Philippine Accountancy Act of 2004 (R.

A 9298)

Objectives and Scope - Assessment

The integrated national professional organization of Certified Public Accountants accredited by the
Board and the Commission per PRC Accreditation No. 15 dated October 2, 1975.

Ans B - PICPA

A person who holds a valid Certificate of Registration and a valid Professional Identification Card issued
by the Commission upon recommendation by the Board to those who have satisfactorily complied with
all the legal and procedural requirements for such issuance, including in appropriate cases, having
passed the CPA licensure examination

 Ans B - CPA

Which of the following statements concerning the practice of accountancy in commerce and industry is
incorrect?

Ans D - A CPA is in the practice of accountancy in commerce and  industry  when  he/she renders 
professional  services  as  a   Certified  Public Accountant  to  more  than one client on a fee basis.

A person is not deemed to be engaged in professional accounting practice if

Ans C - He offers or renders bookkeeping services to more than one client.

Which of the following is not one of the specified objectives of the Accountancy Act of 2004?

Ans D - Promulgation of accounting and auditing standards.

Which of the following statements concerning a CPA’s disclosure of confidential client information is
ordinarily correct?

Ans A - Disclosure may be made to any party on consent of the client.

Practice in Public Accountancy shall constitute in a person

Ans D - Holding out himself/herself as one skilled in the knowledge, science and practice of accounting,
and as a qualified person to render professional services as a certified public accountant; or offering or
rendering, or both, to more than one client on a fee basis or otherwise.

When a CPA represents her/his client before government agencies n tax matters related to accounting,
the CPA is engaged in what sector?

Ans A - Practice in public accountancy

In all of the following situations except one, a person is deemed to be engaged in professional
accounting practice. Which of them is the exception?

Ans D - Appointment in the government where first grade civil service eligibility is a prerequisite.

It is an organization engaged in the practice of public accountancy, consisting of a sole proprietor , either
alone or with one or more staff member(s):

 Ans C - Firm

This is the area of practice of accountancy namely public accountancy, commerce and industry,
academe/education and government.

Ans C - Sector

Professional Regulatory Board of Accountancy - Assessment

The following statements relate to some of the provisions of RA 9298.  Which is correct?

Ans D - It shall be the primary duty of the PRC and the BOA to effectively enforce the provisions of RA
9298.
The following statements relate to the term of office of the chairman and the members of the Board of
Accountancy (BOA).

(I)No person who has served two (2) successive complete terms shall be eligible for reappointment until
the lapse of one (1) year

(II)Appointment to fill up an unexpired term is not to be considered a complete term

(III)A person may serve in the Board of Accountancy for eight consecutive years.

(IV)No person shall serve in the Board for more than 12 years.

Ans D - Only II, III and IV are true

Which of the following is not one of the functions of the Board of Accountancy as specifically provided
under RA 9298?

Ans C - To perform visitorial powers or review professional work of accounting practitioners in a general
or random basis.

The Board of Accountancy shall submit to the PRC the ratings obtained by each candidate within _____
days after the examination, unless extended for just cause.

Ans A - 10

Which statement is correct regarding the term of office of the chairman and the members of the Board
of Accountancy (BOA)?

Ans B - No person who has served two (2) successive complete terms shall be eligible for reappointment
until the lapse of 1 year

Which of the following statements about the composition of the Board of Accountancy is incorrect?

Ans D - The Board shall elect a chairman from among its members  to serve for a term of one year.

Which statement is incorrect regarding the term of office of the chairman and the members of the
Board of Accountancy (BOA)?

Ans D - A member of BOA may continuously serve office for more than nine years.

The following statements relate to CPE credit units.  Which is incorrect?

Ans C - Excess credit units earned may be carried over to the next three-year period including credit
units earned for doctoral and master’s degrees.

The following statements relate to the term of office of the chairman and members of the Board of
Accountancy (BOA).  Which is false?

Ans C - No person who has served two successive complete terms as chairman or member shall be
eligible for reappointment until the lapse of two (2) years.

The following statements relate to the submission of nominations to the Board of Accountancy.  Which
is correct?

Ans B - The APO shall submit its nominations to the PRC not later than thirty (30) days prior to the expiry
of the term of an incumbent chairman or member.

The Board of Accountancy may issue certificate of registration and professional identification card to any
successful examinee:

Ans B - Guilty of immoral or dishonourable conduct.

The Board of Accountancy has the power to conduct an oversight into the quality of audits of financial
statements through a review of the quality control measures instituted by auditors in order to ensure
compliance with the accounting and auditing standards and practices.  This power of the BOA is called

Ans A - Quality assurance review

A member of the BOA shall, at time his/her appointment, possess the following qualifications, except 

Ans B - Must be duly registered CPA with more than ten (10) years of work experience in any scope of
practice of accountancy.

Which of the following is not a valid ground for suspension or removal of members of the Board of
Accountancy?

Ans D - Having been charged of any crime involving moral turpitude.

The members of the Professional Regulatory Board of Accountancy shall be appointed by the

Ans C - President of the Philippines.

Which of the following is not among the qualifications of a member of the Board of Accountancy?

Ans A - He/ She must have at least 10 years of experience in the practice of public accountancy

The Professional Regulatory Board of Accountancy shall be composed of a chairman and six (6) members
to be appointed by the <LIST A>  from a list of three (3) recommendees for each position and ranked by
the <LIST B>, from a list of five (5) nominees for each position submitted by <LIST C>.

Ans D - (LIST A)President of the Philippines;         (LIST B)Commission;          (LISTC)PICPA

Which of the following is not one of the basic duties and responsibilities of the BOA?

Ans C - To designate the dates, places and venues of the CPA licensure examinations

Examination, Registration and Licensure

On exam results and report of ratings, which of the following is correct?

Ans D - None among the given statements is correct.

Which of the following will not be found in the Certificate of Registration issued to successful
examinees?

Ans C - Date of issuance and expiry date

Which of the following is among the qualifications of applicants for CPA licensure examination?

(I)Must be a natural born Filipino citizen

(II)Must be of good moral character

(III)Must be a  holder of the degree of Bachelor of Science in Accountancy

(IV)Must be at least 21 years of age

Ans A - I, II and III only

Which of the following shall be issued to examinees who pass the CPA licensure examination?
Ans C - Certificate of registration and professional identification card

The following were the ratings of examinees who took the very difficult CPA Board Examination on May
2010.

·         Examinee 1 - All subjects garnered a rating of 95%.

·         Examinee 2 - All subjects garnered a rating of 75%.

·         Examinee 3 - One subject garnered a rating of 81% and the other six garnered a rating of 74%.

·         Examinee 4 - One subject garnered a rating of 64% and the other six garnered a rating of 85%.

·         Examinee 5 - Three subjects garnered a rating of 75% and the other four garnered a rating of 74%.

·         Examinee 6 - All subjects garnered a rating of 74%.

·         Examinee 7 - Four subjects garnered a rating of 95%, one with 73% and other 2 with 64%.

·         Examinee 8 - Three subjects garnered a rating of 95%, one with 74% and other three with 73%.

Of the ratings presented above, how many examinees obtain a conditional status in the Board Exam?

Ans C - 2

The Board of Accountancy may issue certificate of registration and professional identification card to any
successful examinee:

Ans C - Who has falsely represented himself/herself in his/her application for examination.

On exam results and report of ratings, which of the following is correct?

Ans D - None among the given statements is correct.

The following documents shall be submitted by applicants for the CPA licensure examination, except:

Ans D - Baptismal Certificate.

Which of the following will not be found in the Certificate of Registration issued to successful
examinees?

Ans C - Date of issuance and expiry date

The Board, subject to the approval of the Commission, may revise or exclude any of the subjects and
their syllabi, and add new ones as the need arises. Provided that the change shall not be more often
than every

Ans B - 3 years

The BOA shall submit to the PRC the ratings obtained by each candidate within how many calendar days
after the examination?

Ans B - 10 days

Which of the following exams must be taken with two years from the preceding examination?

Ans A - Removal exams for conditioned examinees

Which of the following statements concerning the issuance of Certificates of Registration and
Professional Identification Cards to successful examinees is correct?

Ans C - The BOA shall not register and issue a Certificate of Registration and Professional Identification
Card to any successful examinee of unsound mind.

Which of the following does not fall under the admission requirements for CPA examinations?

Ans C - at least twenty one years of age

The Board shall submit to the Commission the ratings obtained by each candidate within how many
calendar days after the examination unless extended for just cause?
Ans A - Ten

A Professional Identification Card bearing the registration number, date of issuance, expiry date, duly
signed by the chairperson of the Commission, shall be issued to every registrant renewable every

Ans B - Three years

The certified public accountant shall be required to indicate which of the following numbers on the
documents he/she signs, uses or issues in connection with the practice of his/her profession?

•      His/her Certificate of Registration

•      Professional Identification Card

•      Professional Tax Receipt

•      Telephone

Ans B - Yes

Yes

Yes

No

The following statements relate to CPA examination ratings. Which of the following is incorrect?

Ans C - Candidates who failed in four complete examinations shall no longer be allowed to take the
examinations the fifth time.

Practice of Accountancy

Listed below are names of four CPA firms and pertinent facts relative to each firm.  Unless otherwise
indicated, the individuals named are CPAs and partners, and there are no other partners.  Which is a
violation of the Implementing Rules and Regulations of RA 9298?

Ans C - Joni and Jona, CPAs (Joni died about three years ago; Jona is continuing the firm as a sole
proprietor.)

The death or disability of an individual CPA and/or the dissolution and liquidation of a firm or
partnership of CPAs shall be reported to the BOA not later than _____ days from the date of such death,
dissolution or liquidation.

Ans B - 30

Which of the following is not observed or required on a 3-year period basis?

Ans B - Reinstatement of a revoked COR

If the application for registration to practice public accountancy of  Sayson and Co. CPAs,  was approved
on July 31, 2009, the registration shall expire on 

Ans D - December 31, 2011

Which of the following statements concerning ownership of working papers is incorrect?

Ans C - Working papers include reports submitted by a CPA to his/her client.

Special/ temporary permit may be issued by the Board to the following persons except:

Ans D - A foreign CPA who can prove that the country of which he or she is a citizen admits citizens of
the Philippines to the practice of the same profession without restriction.

Which of the following statements concerning the use of firm or partnership name is incorrect?
Ans D - A CPA shall practice only under an individual, firm, or partnership name in accordance with
Philippine laws and shall not include any fictitious name but may indicate specialization.

Practice of accountancy in the public sector involves

Ans D - Rendering bookkeeping, auditing, system installation, etc. on a fee basis

Which of the following does not constitute a practice of accountancy?

Ans D - A person is appointed as a marketing director of a government-owned and controlled

corporation.

A partner surviving the death or withdrawal of all the other partners in a partnership may continue to
practice under the partnership name for a period of not more than _____ years after becoming a sole
proprietor.

Ans B - 2

The following statements relate to RA 9298 and its IRRs. Which statement is false?

Ans A - Under the IRR of RA 9298, if a partner in a two member partnership dues, the surviving partner
may continue to practice as an individual under the existing frim title which includes the deceased
partner’s name for a period of time not to exceed five ears.

Affixing the CPA’s seal and signature on the auditor’s report is an indication of:

Ans B - Compliance by the CPA of the requisite accounting and auditing standards and rules.

Which of the following is not represented in the AASC?

Ans B - Bureau of Internal Revenue

Which of the following definitions in the Act describe a convention?

Ans C - It refers to the gathering of professionals which shall include, among others, conferences,
symposia or assemblies for round table discussions.

The death or disability of an individual CPA and dissolution or liquidation of a firm or partnership shall be
reported to the BOA not later than _______ days following the event.

Ans B - 30

If the application for registration to practice public accountancy of  Sayson and Co. CPAs,  was approved
on July 31, 2009, the registration shall be renewed on or before

Ans A - September 30, 2011

The sector that is most represented in the AASC is the

Ans D - Public Practice

A CPA whose certificate have been revoked may be reinstated if he has acted in exemplary manner and
has not committed any illegal, immoral or dishonourable conduct for a period not less than

Ans C - Five years 

Which of the following is required for a partnership for public accountancy practice?

Ans C -All partners must be CPAs.

The Board of Accountancy may issue certificate of registration and professional identification card to any
successful examinee:

Ans B - Convicted by a court of political offense.

A CPA is not allowed to practice public accountancy if the form of business organization is

Ans C - A corporation , whose stockholder’s are all CPA’s

Per RA 9298: A certified public accountant engaged in the practice engaged in the practice of public
accountancy under his/her name, by himself/herself only or with one or more staff members.

Ans A - Individual CPA

The letters “CPA” shall be engraved in what part of the CPA’s seal?

Ans D - Middle of the smaller circle.

A registered professional shall be permanently  exempted  from CPE requirements upon reaching the
age of 

Ans C - 65 years old

The Board of Accountancy may, after the expiration of _____ years from the date of revocation of a
certificate of registration, reinstate the validity of a revoked certificate of registration.

Ans A - 2

Below are the names of three CPA firms and pertinent facts relative to each firm. Unless otherwise
indicated, the individuals named are CPAs and partners, and there are no other partners. Which firm
name and related facts indicates a violation of the IRR of RA 9298?

Ans C - Hugo and Pugo, CPAs (Hugo died 25 months ago, Pugo is continuing the firm as a sole proprietor)

A partner surviving the death or withdrawal of all the other partners in a partnership may continue to
practice under the partnership name for a period of not more than ____ years after becoming a sole
proprietor.

Ans B - 2

According to RA 9298, if a partner in a two-member partnership dies, the surviving partner may
continue to practice as an individual under the existing firm title which includes the deceased partner’s
name

Ans B - For a period of time not to exceed two years.

Which is correct regarding credit units earned in a continuing professional education activity?

Ans C - A CPA who has earned 70 units in a 3-year period from seminars and conventions cannot carry
the excess units to the next 3-year period

Penal and Final Provisions - Assessment

Any person who shall violate any of the provisions of the Accountancy Act or any of its implementing
rules and regulations promulgated by the Board of Accountancy subject to the approval of the PRC,
shall, upon conviction, be punished by

Ans C - A fine of not less than P50,000 or by imprisonment for a period not exceeding two years or both.

Any person who shall violate any of the provisions of the Accountancy Act or any of its implementing
rules and regulations promulgated by the Board of Accountancy subject to the approval of the PRC, shall
upon conviction , be punished by

Ans B - A fine of not more than P50,000

Which of the following is not one of the grounds for proceedings against a CPA?

Ans B - Engaging in public practice while being employed in a private enterprise.

Which of the following is not one of the penalties that can be imposed by the Board of Accountancy?

Ans A - Fine or imprisonment

Any person who shall violate any of the provisions of RA 9298 or any of its implementing rules and
regulations as promulgated by the Board subject to the approval of the Commission, shall, upon
conviction, be punished by

Ans A - A fine of not less than fifty thousand pesos (P 50,000.00) or by imprisonment for a period not
exceeding two (2) years or both.

According to the Philippine Accountancy Act of 2004 (RA 9298), any person who shall violate RA 9298 or
any of its implementing rules and regulations as promulgated by the Professional Regulatory Board of
Accountancy subject to the approval of the PRC, shall upon conviction, be punished by:
Ans C - Not less than fifty thousand (P50,000), or by imprisonment for a period not exceeding two (2)
years, or both

A person whose CPA certificate has been revoked

Ans C - May be reinstated as a CPA by the Board of Accountancy after two years if he has acted in an
exemplary manner

Which of the following statements is/are correct?

Statement 1: It shall be the primary duty of the Commission and the Board to effectively enforce the
provisions of RA 9298 and its Implementing Rules and Regulations.

Statement 2: Any person may bring before the Commission, Board, or the aforementioned officers of
the law, cases of illegal practice or violations of RA 9298 and its Implementing Rules and Regulations.

Ans C - Both statements are correct

CODE OF ETHICS

Fundamental Principles - Assessment

Which of the following is not one of the characteristics of a profession?

Ans D - A responsibility to protect exclusively the interest of a client or employer.

Which statement is incorrect regarding the Code of Ethics for Professional Accountants in the
Philippines?

Ans B - Where a national statutory requirement is in conflict with a provision of the IFAC Code, the IFAC
Code requirement prevails.

Which of the following ethical principles would most likely be compromised if a professional accountant
fails to modify his/her report on financial information that is incorrect, incomplete or unsatisfactory?

Ans B - integrity

Which of the following is a member of IFAC?

Ans A - PICPA

The principle of objectivity imposes which of the following obligations on professional accountants

Ans D - Not to compromise professional or business judgement because of bias, conflict of interest
undue influence of others.

The phase of professional competence that requires a professional accountant to adopt a program
designed to ensure quality control in the performance of professional services consistent with technical
and professional standards is:

Ans B - maintenance of professional competence

Existing accountant, as defined in the Code of Ethics, means

Ans B - A professional accountant in public practice currently holding an audit appointment or carrying
out accounting, taxation, consulting or similar professional services for a client.

The essence of the due care  principle is that the auditor should not be guilty of:

Ans D - negligence

The underlying reason for a code of professional ethics is

Ans No Correct Answer or C The need for public confidence in the quality of service of the profession.

A combination of impartiality, intellectual honesty and a freedom from conflicts of interest.

Ans A - Objectivity
According to the ethical standards of the profession, which of the following acts is generally prohibited?

Ans D - Retaining client records after an engagement is terminated prior to completion and the client
has demanded their return

The code of ethics for professional accountants applies to

Ans D - All CPAs 

The term receiving accountant includes the following, except

Ans D - A professional accountant in public practice currently holding an audit appointment or carrying
out accounting, taxation, consulting, or similar professional services for a client.

In order to achieve the objectives of the accountancy profession, professional accountants have to
observe a number of prerequisites or fundamental principles.  The fundamental principles include the
following, except

Ans D - Confidence

Which of the following fundamental principles would most likely be threatened when a professional
accountant in public practice is asked to provide a second opinion which is based on inadequate sets of
facts or evidence?

Ans D - professional competence and due care

The principle of confidentiality applies to:

Ans D - All professional accountants

When a professional accountant performs services in a country other than the home country and
differences on specific matters exist between ethical requirements of the two countries, the following
provisions should be applied

Sol.

a) When the ethical requirements of the country in which the services are being performed are
less strict than the Code of Ethics of the Philippines , then the Code of Ethics of
the Philippines should be applied.
b) When the ethical requirements of the country in which services are being performed are stricter
than the Code of Ethics of the Philippines, then the ethical requirements in the country where
services are being performed should be applied.
c) When the ethical requirements of the home country are mandatory for services performed
outside that country and are stricter, then the ethical requirements of the home country should
be applied.

Ans D - Any of the above.

Which of the following fundamental principles requires a professional accountant to comply with
relevant laws and regulations?

Ans B - professional behavior

Which of the following fundamental principles would most likely be threatened when a professional
accountant in public practice charges contingent fees?

Ans C - objectivity

Before accepting a new client relationship, a professional accountant in public practice should consider
whether acceptance would create threats to compliance with the fundamental principles. Which of the
following fundamental principles will be threatened when question arises about the integrity of
prospective client’s management and board of directors?

Ans D - integrity and professional behavior

Which of the following ethical principles implies fair dealings and truthfulness?

Ans A - integrity

Professional competence should include

1)   Attainment of professional competence 

2)   Maintenance of professional competence

Ans A - 1)   YES       2)   YES;

Which of the following is not explicitly referred to in the Code of Ethics as source of technical standards?

Ans A - Commission of Audit (COA)

Professional accountants may encounter problems in identifying unethical behavior or in resolving an

ethical conflict.  When faced with significant ethical issues, professional accountants should do the
following, except

Ans C - If the problem is not resolved with the immediate superior and the professional accountant
determines to go to the next higher managerial level, the immediate superior need not be notified of
the decision.

Which of the following is not a fundamental ethical principle?

Ans D - Independence

The principle of professional competence and due care imposes certain obligations on professional

accountants. Which of the following is not one of the obligations required by this ethical principle?

Ans B - To be straightforward and honest in all professional and business relationships.

The principle of professional behavior requires a professional accountant to

Ans D - Act in a manner consistent with the good reputation of the profession and refrain from any
conduct which might bring discredit to the profession.

Which of the following fundamental principles would most likely be threatened when a professional
accountant in public practice quotes a professional fee that is too low?

Ans D - professional competence and due care

The CPA profession deemed it necessary to establish a code of ethics and a mechanism for its
enforcement because

Ans C - Acceptance of responsibility to the public is a distinguishing mark of a profession.

The Code of Ethics for Professional Accountants in the Philippines defined “practice” as

Ans D - A sole proprietor or a partnership of professional accountants which offers professional services
to the public.

The term professional accountant in public practice includes the following, except

Ans C - Professional accountants employed in the public sector having managerial responsibilities.

Which of the following fundamental principles would most likely be threatened when a professional
accountant accepts an engagement before knowing all the pertinent facts about the new engagement?

Ans D - professional competence and due care

Which of the following is incorrect regarding confidentiality?

Ans C - Confidentiality should always be observed by a professional accountant unless specific authority
has been given to disclose information or there is a legal or professional duty to disclose.

Part A of the Code of professional ethics establishes fundamental principles of professional ethics for
professional accountants and provides a conceptual framework for applying those principles. Which of
the following is not one of the fundamental principles:

Ans D - independence
Which of the following most accurately states how objectivity has been defined by the Code of Ethics?

Ans C - A combination of impartiality, intellectual honesty and a freedom from conflict of interest.

May a CPA hire for the CPA’s public accounting firm a non-CPA systems analyst who specializes in
developing computer systems?

Ans B - Yes, provided the CPA is able to supervise the specialist and evaluate the specialist’s end product

Which of the following is the correct order of steps in attaining professional competence?

1.  education

2.  professional experieces

3.  professional examination

Ans B - 1, 3 and 2

Which of the following ethical principles requires proper supervision of assistants?

Ans A - professional competence and due care

A CPA shall not disclose confidential information obtained during an audit engagement in which one of
the following situations?

Ans D - To a successor auditor without the client’s permission.

A professional accountant has a professional duty or right to disclose confidential information in each of
the following, except

Ans B - To disclose to BIR fraudulent scheme committed by the client on payment of income tax.

Confidential client information may be disclosed in the following circumstances,  except

Ans C - When the relationship between the client and the auditor ceases.

The principle of confidentiality imposes an obligation on professional accountants to refrain from:

Ans B - using confidential information acquired as a result of professional and business relationships to
their personal advantage or the advantage of third parties.

Which statement is correct regarding the Code of Ethics for Professional Accountants in the Philippines?

Ans D - All CPA’s are expected to comply with the ethical requirements of the Code and other ethical
requirements that may be adopted and approved by IFAC.  Apparent failure to do so may result in an
investigation into the CPA’s conduct.

Which of the following is the least required in attaining professional competence?

Ans D - Continuing awareness of development in the accountancy profession.

According to the standards of the profession, which of the following circumstances will prevent a CPA
performing audit engagements from being independent?

Ans C - Employment of the CPA’s spouse as a client’s director of internal audit

Competence as a certified public accountant includes all of the following except

Ans C - Warranting the infallibility of the work performed.

The Code recognizes that the objectives of the accountancy profession are to work to the highest
standards of professionalism, to attain the highest levels of performance and generally to meet the
public interest requirements set out above.  These objectives require four basic needs to be met
including the following, except

Ans D – Integrity

Which statement is incorrect regarding the Code of Ethics for Professional Accountants in the 
Philippines?

Ans B - The code is divided into two parts, part A and part B

Threats to Compliance with the Fundamental Principles - Assessment

Using the same senior personnel on an assurance engagement over a long period of time would most
likely  create

Ans C - familiarity threat

Examples of circumstances that may create self-interest threat include

Sol.

a) Contingent fees relating to assurance engagements

b) A direct financial interest or material indirect financial interest in an assurance client.
c) A loan or guarantee to or from an assurance client or any of its directors or officers

Ans D - All of the above.

Which of the following threats to independence may be created by family and personal relationships
between a member of the assurance team and a director, an officer, or an employee of the assurance
client in a position to exert direct and significant influence over the subject matter information of the
assurance engagement?

Ans A - Self-interest, familiarity or intimidation threats

This occurs when a firm or a member of the assurance team could benefit from a financial interest in an
assurance client.

Ans A - self-interest threat

Accepting gifts or undue hospitality from an assurance client would most likely create

Ans A - Familiarity threat

The recruitment of senior management for an assurance client, such as those in a position to affect the
subject matter of the assurance engagement, may create the following current or future threats to
independence, except

Ans D - Self-review threat

Which part of the Code establishes the fundamental principles of professional ethics for professional
accountants and provides a conceptual framework that professional accountants shall apply to identify
threats to compliance with the fundamental principles, evaluate the significance of the threats
identified, and apply safeguards, when necessary, to eliminate the threats or reduce them to an
acceptable level?

Ans A - Part A.

Which of the following would most likely create a self-review threat?

Ans D - a former officer of a client is now a member of the assurance team.

Occurs when a firm or a member of the assurance team could benefit from a financial interest in, or
other self-interest conflict with, an assurance client.

Ans A - Self-interest threat

The following forms of assistance to a financial statement audit client do not generally threaten the
firm’s independence, except

Ans C - Authorizing or approving transactions.

Jayson, CPA, was offered the engagement to audit W Corporation for the year ended December 31,
2016.  He had served as a director of W Corporation until December 31, 2014, and his spouse currently
owns 6,000 of the 100,000 outstanding share capital of W Corporation.  Jayson disassociated from W
Corporation prior to being offered the engagement.  Moreover, the engagement does not cover any
period that includes Jayson’s association or employment with W Corporation.  Under the code of ethics,
Jayson should

Ans D - Refuse the engagement because of his spouse’s stock ownership.

Occurs when any product or judgment of a previous assurance engagement or non-assurance

engagement needs to be re-evaluated in reaching conclusions on the assurance engagement or when a
member of the assurance team was previously a director or officer of the assurance client, or was an
employee in a position to exert direct and significant influence over the subject matter of the assurance
engagement.

Ans B - Self-review threat

Which of the following threats to independence is created when a member of the assurance team
participates in the assurance engagement while knowing, or having reason to believe, that he is to, or
may, join the assurance client sometime in the future?

Ans B - Self-interest threat

Which of the following is a “self-review” threat to member independence?

Ans C - An engagement team member prepares invoices for the attest client

Intimidation threat 

Ans B - Occurs when a member of the assurance team may be deterred from acting objectively and
exercising professional skepticism by threats, actual or perceived, from the directors, officers or
employees of an assurance client.

Which of the following circumstances would least likely create self-interest threat?

Ans D - Having a close personal relationship between a member of the assurance team and the
assurance client, its directors, officers or employees.

Which of the following least likely create “self-interest threat”

Ans D - Pressure to reduce inappropriately the extent of work performed in order to reduce fees.

A threat to objectivity may be created when a professional accountant in public practice performs
services for clients whose interests are in conflict with each other. In addition, this could also pose
threat to

Ans B - confidentiality

A CPA –lawyer, acting as legal counsel to one of his audit client, is an example of

Ans C - Advocacy threat

When threats to independence that are not clearly insignificant are identified, the following are
appropriate, except

Ans C - When the firm decides to accept or continue the assurance engagement, the decision need not
be documented provided the threats identified were eliminated.

According to the Philippine Code of Ethics, independence is potentially affected by self-interest, self-
review, advocacy, familiarity and intimidation threats. Which of the following best describes “advocacy
threat”?
Ans D - This occurs when a firm, or a member of the assurance team, promotes, or may be perceived to
promote, an assurance client’s position or opinion to the point that objectivity may, or may be perceived
to be, compromised.

A partner rotating after a pre-defined period should not resume the lead engagement partner role until
a further period of time, normally ____ year(s), has elapsed.

Ans B - 2

Occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote, an
assurance client’s position or opinion to the point that objectivity may, or may be perceived to be,
compromised. Such may be the case if a firm or a member of the assurance team were to subordinate
their judgment to that of the client.

Ans C - Advocacy threat

Which of the following threats to independence may be created when litigation takes place, or appears
likely, between the firm or a member of the assurance team the assurance client?

Ans C - Self-interest or intimidation threat

A close business relationship between a firm or a member of the audit team, or a member of that
individual’s immediate family, and the audit client or its management  may create

Ans A - Self-interest and intimidation threats

After evaluating the significance of the threat created by an actual or threatened litigation, the following
safeguards should be applied to reduce the threat to an acceptable level, except

Ans D - Withdraw from, or refuse to accept, the assurance engagement.

Occurs when, by virtue of a close relationship with an assurance client, its directors, officers or
employees, a firm or a member of the assurance team becomes too sympathetic to the client’s
interests.

Ans D - Familiarity threat

These are fees calculated on a predetermined basis relating to the outcome or result of a transaction or
the result of the work performed.

Ans A - Contingent fees

As defined in the Code, “a valuation comprises the making of assumptions with regard to future
developments, the application of certain methodologies and techniques, and the combination of both in
order to compute a certain value, or range of values, for an asset, a liability or for a business as a
whole.”  Which of the following threats may be created when a firm or a network firm performs
valuation for an audit client that is to be incorporated in the client’s financial statements?

Ans C - Self-review threat

Examples of circumstances that may create self-review threat do not include

Choices:

a) preparation of original data used to generate financial statements or preparation of other

records that are the subject matter of the assurance engagement.
b) a member of the assurance team being, or having recently been, an employee of the assurance
client in a position to exert direct and significant influence over the subject matter of the
assurance engagement.
c) performing services for an assurance client that directly affect the subject matter of the
assurance engagement.

Ans D - potential employment with an assurance client.

What threat to independence may be created when the fees generated by the assurance client
represent a large proportion of the revenue of an individual of the firm?

Ans C - Self-interest threat

Acting for an audit client in the resolution of a dispute or litigation would most likely create

Ans C - advocacy threat

Examples of circumstances that may create familiarity threat least likely include

Ans D - Dealing in, or being a promoter of, share or other securities in an assurance client.

What threat to independence is created when the litigation support services provided to an audit client
include the estimation of the possible outcome and thereby affects the amounts or disclosures to be
reflected in the financial statements?

Ans A - Self-review threat

In the case of audit engagements, it is in the public interest and, therefore, required by the Code that
members of audit teams, firms and network firms shall be independent of audit clients.  Independence
requires

Ans C - Both independence of mind and independence in appearance

Occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote, an
assurance client’s position or opinion to the point that objectivity may, or may be perceived to be,
compromised.  Such may be the case if a firm or a member of the assurance team were to subordinate
their judgment to that of the client.

Ans B - Advocacy threat

A loan, or guarantee of a loan, to the firm from an audit client that is a bank or a similar institution,
would not create a threat to independence provided

I.      The loan, or guarantee, is made under normal lending procedures, terms and requirements.

       II.      The loan is immaterial to both the firm receiving the loan and the audit client.

Ans D - Both I and II

This refers to the threat that a professional accountant will not appropriately evaluate of a previous
judgement made or service performed by the professional accountant, by another individual within the
professional accountant’s firm or employing organization, on which the accountant will rely when
forming a judgement as a part of providing a current service.

Ans A - self-interest threat or B Self review threat is correct

When a close family member of a member of the assurance team is a director, an officer, or an
employee of the assurance client in a position to exert direct and significant influence over the subject
matter information of the assurance engagement, threats to independence may be created.  If the
threats are other than clearly insignificant, which of the following safeguards can be applied to reduce
the threats to an acceptable level?

I.      Removing the individual from the assurance team.

II.    Where possible, structuring the responsibility of the assurance team so that the professional does
not deal with matters that are within the responsibility of the close family member.

                  III.           Policies and procedures to empower staff to communicate to senior levels within the
firm any issue of independence and objectivity that concerns them.

Ans D - I, II, and III

A direct financial interest or a material indirect financial interest in the audit client of a member of the
audit team or his immediate family member may create a significant self-interest threat.  Which of the
following safeguards would be least likely considered to eliminate the threat or reduce it to an
acceptable level?
Ans A - Discuss the matter with those charged with governance of the audit client.

What threat to independence may be created if fees due from an assurance client for professional
services remain unpaid for a long time, especially if a significant part is not paid before the issue of the
assurance report for the following year?

Ans B - Self-interest threat

Financial interests may be held through an intermediary (for example, a collective investment vehicle,
estate or trust).  When control over the investment vehicle or the ability to influence investment
decisions exists, the code defines that financial interest to be a/an

Ans A - Direct financial interest.

Which of the following would not generally create a threat to independence?

Ans A - The purchase of goods and services from an assurance client by the firm (or from a financial
statement audit client by a network firm) or a member of the assurance team provided that the
transaction is in the normal course of business and on an arm’s length basis.

Which of the following fundamental principles would most likely be threatened when a professional
accountant in public practice assumes custody of client’s assets?

Ans C - integrity

When a firm obtains an assurance engagement at a significantly lower fee level than that charged by the
predecessor firm, or quoted by other firms, the self-interest threat created will not be reduced to an
acceptable level unless

I.      The firm is able to demonstrate that appropriate time and qualified staff are assigned to the task.

           II.       All applicable assurance standards, guidelines, and quality control procedures are being
complied with.

Ans C - Both I and II

Familiarity threat could be created under the following circumstances except

Ans A - A professional accountant accepting gifts from a client whose value is inconsequential or trivial.

Which of the following fundamental principles would most likely be threatened when a client offers gifts
or hospitality to a professional accountant in public practice?

Ans B - objectivity

This threat to independence occurs when a member of the assurance team has recently performed
services for an assurance client that directly affect the subject matter information of the assurance
engagement (e.g., valuation services).

Ans A - Self-review threat.

The following circumstances create advocacy threats for a professional accountant in public practice
except

Ans D - A member of the assurance team having a significant close business relationship with an
assurance client.

This occurs when, by virtue of a close relationship with an assurance client, its directors, officers or
employees, a firm or a member of the assurance team becomes too sympathetic to the client’s interest.

Ans D - familiarity threat

This threat to independence occurs when a member of the assurance team may be deterred from acting
objectively and exercising professional skepticism by threats, actual or perceived, from the directors,
officers or employees of an assurance client.

Ans A - intimidation threat

When the total fees generated by an assurance client represent a large proportion of a firm’s total fees,
the dependence on that client or client group and concern about the possibility of losing the client may
create a/an

Ans A - Self-interest threat

The threat that a professional accountant will be deterred from acting objectively because of actual or
perceived pressures from the client is known as

Ans A - Intimidation threat

Which of the following fundamental principles would most likely be threatened when a professional
accountant in public practice solicits new work through advertising or other forms of marketing?

Ans D - professional behavior

The following circumstances may create intimidation threats, except

Ans D - A member of the assurance team being, or having recently been, a director or officer of the
client.

This refers to the threat that a financial or other interest will inappropriately influence the professional
accountant’s judgement or behaviour;

Ans A - Self- interest threat

Examples of circumstances that may create self-review threat least likely include

Ans D - Potential employment with an assurance client.

Safeguards - Assessment

Statement 1: Safeguards are actions or other measures that may eliminate threats or reduce them to an
acceptable level.

Statement 2: They fall into two broad categories: (a) Safeguards created by the profession, legislation or
regulation; and (b) Safeguards in the work environment.

Ans A - True, True

When the professional accountant determines that appropriate safeguards are not available or cannot
be applied to eliminate the threats to independence or reduce them to an acceptable level, the
professional accountant shall

I.      Eliminate the circumstance or relationship creating the threats.

           II.      Decline or terminate the audit engagement.

Ans D - Either I or II

Safeguards created by the profession, legislation or regulation, include the following, except

Ans D - Policies and procedures that emphasize the assurance client’s commitment to fair financial
reporting

Consideration of the nature of the safeguards to be applied will be affected by matters such as the

(1) Significance of the threat

(2) Nature of the assurance engagement

(3) Intended users of the assurance report

(4) Structures of the firm

Ans B - (1)YES:   (2)YES;   (3)YES;    (4)NO

When a professional accountant is asked to provide a second opinion, the professional accountant has a
responsibility to identify potential threat to fundamental principles. If the identified threat is other than
clearly insignificant, appropriate safeguards should be applied. Which of the following safeguards could
possibly eliminate the threat that arises when providing second opinions?

Ans C - Seek client’s permission to contact the existing accountant

Which of the following is an example of engagement-specific safeguards in the work environment?

Ans B - Disclosing to those charged with governance of the client the nature of service provided and
extent of fees charged.

Safeguards within the assurance client, include the following, except

Ans B - The assurance client has competent employees to make managerial decision. (walang margin
ang choices) Or A - Professional standards and monitoring and disciplinary processes. (with margin ang
choices)

Safeguards with the firm’s own systems and procedures, include the following except

Ans B - External review of the firm’s quality control system.

According to Section 240 of the Code of Ethics, fees charged for assurance engagements should be a fair
reflection of the value of the work involved.  In determining professional fees, the following should be
taken into account, except

Ans B - The outcome or result of a transaction or the result of the work performed.

Safeguards within the firm’s own systems and procedures, include the following, except

Ans B - External review of a firm’s quality control system.

These are policies and procedures designed to eliminate or to reduce threats to fundamental principles
to an acceptable level.

Ans C - Safeguards

When the safeguards available are insufficient to eliminate the threats to independence or to reduce
them to an acceptable level, or when a firm chooses not to eliminate the activities or interest creating
the threat, the only course of action available will be the

Ans D - Refusal to perform, or withdrawal from, the assurance engagement.

The safeguards available to eliminate the threats or reduce them to an acceptable level include

(1)  Safeguards created by the profession

legislation or regulation

(2) Safeguards within the assurance client

(3) Safeguards within the firm’s own systems and procedures

Ans B - (1)YES:   (2)YES:   (3)NO

Professional Appointment - Assessment

Which statement is incorrect regarding relations with other professional accountants in public practice?

Ans D - The receiving accountant may express any criticism of the professional services of the existing
accountant without giving the latter an opportunity to provide all relevant information.

Retainer’s fee basis is when

Ans D - The client is billed at a single amount for the entire engagement or C - The client is billed a fixed
fee periodically for the services rendered during a designated period of time.

Which of the following are elements of a CPA firm’s quality control that should be considered in
establishing its quality control policies and procedures?

1)   Ethical Requirements                    

2)   Human Resources 

3)   Engagement Performance         

Ans C - 1)   Yes       2)   Yes       3)   Yes

The nature, timing, and extent of an audit firm’s quality control policies and procedures depend on

1)   The CPA Firm’s Size

2)   The Nature  of the CPA Firm’s Practice 

3)   Appropriate Cost-Benefit Considerations

Ans B - 1)   Yes       2)   Yes       3)   Yes

A distinct sub-group, whether organized on geographical or practice lines.

Ans A - Office

Communication between the receiving accountant and existing accountant is not intended

Ans A - To protect a professional accountant in public practice from accepting the appointment in
circumstances where all the pertinent facts are not known.

Which element of a system of quality control is addressed by the establishment of policies and
procedures designed to provide the firm with reasonable assurance that it has sufficient personnel with
the competence, capabilities, and commitment to ethical principles?

Ans C - Human resources

Which statement is incorrect regarding activities incompatible with the practice of public accountancy?

Ans B - A professional accountant in public practice should not concurrently engage in any business,
occupation or activity which would be incompatible with the rendering of professional services.

Which statement is incorrect regarding Professional Competence and Responsibilities Regarding the Use
of Non-Accountants?

Ans D - If at any time the professional accountant is not satisfied that proper ethical behavior can be
respected or assured, the engagement should not be accepted unless the engagement has commenced
in which case the auditor is allowed to finish the engagement.
For audits of financial statements of listed entities, the engagement partner should not issue the
auditor’s report until the completion of the

Ans A - Engagement Quality Control Review

The primary purpose of establishing quality control policies and procedures for deciding whether to
accept a new client is to

Ans D - Minimize the likelihood of association with clients whose management lacks integrity.

The engagement partner should take responsibility for the direction, supervision, and performance of
the audit engagement in compliance with professional standards and regulatory and legal requirements,
and for the auditor’s report that is issued to be appropriate in the circumstances.  Supervision includes
the following, except

Ans C - Informing the members of the engagement team of their responsibilities.

 Which statement is incorrect regarding activities incompatible with the practice of public accountancy?

Ans B - A professional accountant in public practice should not concurrently engage in any business,
occupation or activity which would be incompatible with the rendering of professional services.

Lead engagement partner is

I. The partner responsible for signing the report on the consolidated financial statement of the audit
client.

II. Whose relevant, the partner responsible for signing the report in respect of any entity whose financial
statements from part of the consolidated financial statements and on which is a separate stand-alone
report is issued.

III. When no consolidated financial statements are prepared, the partner responsible for signing the
report on the financial statements.

Ans A - I, II and III

The existing accountant, on receipt of the communication from the proposed professional accountant in
public practice, should not

Ans D - Disclose all information needed by the proposed professional accountant in public practice to be
able to decide whether or not to accept the appointment, if permission is not granted.

Which of the following is incorrect regarding integrity and objectivity?

Ans D - Professional accountants should neither accept nor offer any gifts or entertainment.

As defined in PSQC 1, __________ is a process comprising an ongoing consideration and evaluation of

the firm’s system of quality control, including a periodic inspection of a selection of completed
engagements, designed to provide the firm with reasonable assurance that its system of quality control
is operating effectively.

Ans A - Monitoring

Who should take responsibility for the overall quality on each audit engagement?

Ans B - Engagement partner

Fees and Other Types of Remuneration - Assessment

The CPA should not undertake an engagement if his audit fee is to be based upon
Ans A - a percentage of audited net income

In determining estimates of fees, an auditor may take into account each of the following, except the

Ans D - Attainment of specific findings

Which statement is incorrect regarding professional fees?

Ans D - It is not proper for a professional accountant in public practice to charge a client a lower fee than
has previously been charged for similar services.

Yellow, a non-CPA has a law practice.  Red, CPA, has agreed to pay Yellow 10% of the fee for services
rendered by Red to Yellow’s clients.  Who, if anyone, is in violation of the code of ethics?

Ans A - Only Red

Professional fees should be a fair reflection of the value of the professional services performed for the
client, taking into account:

Sol.

a) The skill and knowledge required for the type of professional services involved.
b) The level of training and experience of the persons necessarily engaged in performing the
professional services.
c) The time necessarily occupied by each person engaged in performing the professional services
and the degree of responsibility that performing those services entails

Ans D - All of the above

The Rules of Conduct will ordinarily be considered to have been violated when the professional
accountant represents that specific consulting services will be performed for a stated fee and it is
apparent at the time of the representation that the

Ans D - Professional accountant would not be independent.

Which of the following fee arrangements would violate the code of Professional Conduct?

Ans A - A fee based on the approval of a bank loan.

Which of the following actions by a professional accountant in public practice will not result in violation
of the code of Ethics regarding commissions?

Ans D - Entering into an arrangement for the purchase of the whole or part of an accounting practice
requiring payments to individuals formerly engaged in the practice or payments to their heirs or estates.

In which of the following situations would a CPA be in violation of the rules of professional ethics in
determining professional fees?

Ans D - A fee that is based on 10% of the client’s adjusted net income for the current year

Professional fees should be a fair reflection of the value of the professional services performed for the
client, taking into account:

(1) The skill and knowledge required for the type of professional services involved.

(2) The level of training and experience Of the persons necessarily engaged In performing the
professional services

(3)The time necessarily occupied by each person engaged in performing the professional services
(4) The degree of responsibility that Performing those services entails

Ans B - (1)YES;    (2)YES;   (3)NO;    (4)NO

Marketing Professional Services - Assessment

This is the communication to the public of information as to the services or skills provided by
professional accountants in public practice with a view to procuring professional business.

Ans A - Advertising

This refers to the communication to the public of facts about a professional accountant which are not
designed for the deliberate promotion of that professional accountant.

Ans B - Publicity

Which of the following is not acceptable?

Ans A - An appointment of a professional accountant in a matter of national importance was publicized.

Professional accountants press and other media releases undertaken to commemorate  anniversaries in
public practice by informing the public of their achievements or contributions towards nation building
are

Ans D - Allowed provided such undertaking is done only once every 5 years.

Which of the following is acceptable?

Ans C - A professional accountant in public practice indicated in his stationery that he is a tax expert.

The communication to the public of facts about a professional accountant which are not designed for
the deliberate promotion of that professional accountant.

Ans A - Publicity

The approach to a potential client for the purpose of offering professional services is called

Ans B - solicitation

Professional accountant who author books or articles on professional subjects, may state

(1)His or her name

(2)Professional qualification

(3)Name of organization

(4)Information as to the services his or Her firm provide

Ans B - (1)YES;    (2)YES;     (3)YES;    (4)NO

In the marketing and promotion of themselves and their work, professional accountants should

Sol.

a) Not use means which brings the profession into disrepute

b) Not make exaggerated claims for the services they are able to offer, the qualifications they
possess, or experience they have gained.
c) Not denigrate the work of other accountants.

Ans D - All of the above.

Advertising as defined in the Code of Ethics, means

Ans C - The communication to the public of information as to the services or skills provided by
professional accountants in public practice with a view to procuring professional business.

As defined in the Code of Ethics, __________ is the communication to the public of facts about a
professional accountant which are not designed for the deliberate promotion of that professional
accountant.

Ans B - Publicity

The holding of media-covered events undertaken only to commemorate a professional accountant’s

anniversaries in public practice does not violate the rules on advertising and solicitation provided that
such undertaking should be done only every _____ years of celebration.

Ans B - 10

Which of the following statements concerning publicity is incorrect?

Ans B - Professional accountants who author books or articles on professional subjects may state their
name and professional qualifications; give the name of their organization; and give any information as to
the services that the firm provides.

As defined in the Code of Ethics, __________ is the communication to the public of information as to the
services or skills provided by professional accountants in public practice with a view to procuring
professional business.

Ans A - Advertising

Publicity by individual professional accountants in public practice is acceptable provided:

(1)It has as its object the notification to the public or such sectors of the

            public as are concerned, of matters of fact in a manner that is not false, misleading or deceptive

(2)It is in good taste

(3)It is professionally dignified

(4)It avoids frequent repetition of, and any undue prominence being given to the name of the
professional accountant in public practice

Ans C - (1)NO;    (2)YES;    (3)YES;    (4)NO

A professional accountant in public practice is allowed to

Ans D - Inform interested parties through any medium that a partnership or salaried employment of an
accountancy nature is being sought.

Which of the following is true regarding advertising and solicitation?

Ans A - Advertising, but not solicitation, by individual professional accountants in public practice is
permitted in the Philippines.

All forms of advertisements must have a prior review and approval by the

Ans B - Risk management partner

A CPA in public practice should not

Ans A - Publish services in billboards like tarpaulin or streamers

Generally, advertising and publicity in any medium are acceptable provided it is:
Ans D - not self-laudatory

A professional accountant may invite the following to attend training courses or seminars conducted for
the assistance of staff

(1)Clients

(2)Staff

(3)Other potential accountants

(4)Potential clients

Ans B - (1)YES;           (2)YES;         (3)YES;         (4)NO

Gifts and Hospitality - Assessment

Offer of gifts or undue hospitality from a client may create threats to objectivity. In evaluating the
significance of threat created by such offer, the professional accountant should consider the:

(1)Nature of the offer

(2)Value of the offer

(3)Intent behind the offer

Ans A - (1)YES;        (2)YES;        (3)YES

Custody of Client Assets - Assessment

When a professional accountant is entrusted with the custody of money or other assets belonging to
others, the professional accountant should not

Ans B - use such assets for purposes other than those for which they are intended

Which statement is incorrect regarding clients’ monies?

Ans D - Fees due from a client may be drawn from clients’ monies without the need of notifying the
client.

Objectivity - All Services - Assessment

A professional accountant may be associated with a tax return that

Ans D - Uses of estimates if such use is generally acceptable or if it is impractical under the
circumstances to obtain exact data.
When a  professional accountant learns of a material error or omission in a tax return of a prior year, or
of the failure to file a required tax return, the professional accountant has a responsibility to do the
following, except

Ans B - Immediately inform the revenue authorities.

Which of the following is incorrect regarding the professional accountants’ tax practice?

Ans C - A professional accountant may hold out to a client or an employer the assurance that the tax
return prepared and the tax advice offered are beyond challenge.

Independence - Assessment

The following forms of assistance to a financial statement audit client do not generally threaten the
firm’s independence, except

Ans C - Authorizing or approving transactions

Independence is potentially affected by

(I)Self-interest threat

(II)Intimidation threat

(III)Self-review threat

(IV)Familiarity threat

(V)Advocacy Threat

Ans A - I,II,III,IV and V

Which of the following is incorrect regarding independence?

Ans D - Independence is a combination of impartiality, intellectual honesty and a freedom from conflicts
of interest.

The firm should be independent of the client in the following engagements

(1)Assurance engagements provided to an audit client

(2)Assurance engagements provided to clients that are not audit clients, when the report is not
expressly restricted for use by identified users

(3)Assurance engagements provided to clients that are not audit clients, when the assurance report is
expressly restricted for use by identified users

Ans B - (1)YES;     (2)YES;      (3)NO

If requested to perform a review engagement for a nonpublic entity in which an accountant has an
immaterial direct financial interest, the accountant is

Ans B - Not independent and, therefore, may not issue a review report.
Close family include the following, except

Ans D - Spouse

A CPA, while performing an audit, strives to achieve independence in appearance in order to

Ans C - Maintain public confidence in the profession.

For assurance engagements provided to clients that are not audit clients, when the report is not
expressly restricted for use by identified users, the following should be independent of the client

(1)The members of the assurance team

(2)The firm

(3)Network firms

Ans B - (1)YES;     (2)YES;     (3)NO

Which of the following should be independent of the financial statement audit client?

(1)The members of the assurance team

(2)The firm

(3)Network firms

Ans A - (1)YES;      (2)YES;     (3)YES

According to the standards of the profession, which of the following activities would most likely not
impair a CPA’s independence?

Ans A - Providing advisory services for a client

The Philippine Code of Ethics for professional accountants requires independence

(1)Of mind

(2)In appearance

Ans A - (1)YES     (2)YES

Independence in auditing means

Ans C - Taking an unbiased viewpoint

The following statements relate to the provision of taxation, internal audit or IT Systems services to
audit clients.  Which is false?
Ans A - Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for the
purpose of preparing accounting entries that will be subsequently audited by the firm creates a self-
interest threat.

 Ultimately, the decision as to whether the CPA is independent or not, will be made by the

Ans D - Auditor

One of the major differences between auditors and other professionals is that  most professionals

Ans C - Need not be concerned about independence.

Which of the following is an example of an intimidation threat that may affect the independence of the
professional accountant?

Ans B - Threat of replacement over a disagreement with the application of an accounting principle.

The following statements relate to the provision of legal services to an audit client.  Which is incorrect?

Ans A - The provision of legal services to an audit client involving matters that would not be expected to
have a material effect on the financial statements may create a self-review threat.

A financial interest beneficially owned through a collective investment vehicle, estate, trust or other
intermediary over which the individual or entity has no control.

Ans A - Indirect financial interest

The firm should be independent of the client in the following engagements

(1)Assurance engagements provided to an audit client

(2)Assurance engagements provided to clients that are not audit clients, when the report is not
expressly restricted for use by identified users

(3)Assurance engagements provided to clients that are not audit clients, when the assurance report is
expressly restricted for use by identified users

Ans B - (1)YES;     (2)YES;      (3)NO

It refers to the avoidance of facts and circumstances that are so significant that a reasonable and
informed third party, having knowledge of all relevant information, including safeguards applied, would
reasonably conclude a firm’s or a member of the assurance team’s integrity, objectivity or professional
skepticism had been compromised.

Ans C - Independence in appearance

Independence is required whenever a professional accountant performs:

Ans B - assurance services

The Code of Ethics requires the members of the assurance team and the firm to be independent of the
assurance client during the period of the assurance engagement.  Which of the following statements
relating to the period of engagement is correct?

Ans C - In the case of a financial statement audit engagement, the engagement period includes the
period covered by the financial statements reported on by the firm.

For assurance engagements provided to an audit client, the following should be independent of the
client

(1)members of the assurance team

(2)The firm

(3)Network firms

Ans A - (1)YES;      (2)YES;     (3)YES

Direct financial interest is a financial interest

(1)Owned directly by and under the control of an individual or entiry (including those managed on a
discretionary basis by other)

(2) beneficially owned through a collective investment vehicle, estate, trust or other intermediary over
which the individual or entity has control

(3)beneficially owned through a collective investment vehicle, estate, trust or other intermediary over
which the individual or entity has no control

Ans B - (1)YES;     (2)YES;     (3)NO

Which of the following will not create self-interest threat for a professional accountant in public
practice?

Ans D - Preparing the original data used to generate records that are the subject matter of the assurance
engagement.

Which of the following circumstances may create advocacy threat for a professional accountant in public
practice?

Ans A - The firm promoting shares in an audit client.

Financial interest means

Ans D - An interest in an equity or other security, debenture, loan or other debt instrument of an entity,
including rights and obligations to acquire such an interest and derivatives directly related to such
interest.

Kar, CPA, is a staff auditor participating in the audit engagement of Fort, Inc. Which of the following
circumstances impairs Kar’s independence?

Ans D - Kar’s sibling is director of internal audit at Fort

FUNDAMENTALS OF AUDITING AND ASSURANCE SERVICES

Assurance and Engagement: Nature and Objective - Assessment

The Philippine Framework for Assurance Engagements

Ans B - Defines and describes the elements and objectives of an assurance engagement, and identifies
engagements to which PSAs, PSREs, and PSAEs apply.

Assurance services are best described as

Ans B - Independent professional services that improve the quality of information, or its context, for
decision makers.

The definition of auditing contained within A Statement of Basic Auditing Concepts recognizes that
auditing includes both a(n)

Ans C - Investigative process and a reporting process.

Which one of the following is not a provider of assurance services?

Ans D - PICPA

When a CPA expresses an opinion on the financial statements, his responsibilities extend to

Ans D - Whether the results of the client’s operating decisions are fairly presented in the financial
statements.

Which of the following services would be most likely to be structured as an assurance engagement?

Ans C - An engagement to issue a report addressing an entity’s compliance with requirements of

specified laws.

Assurance services least likely involve

Ans D - Implementing a system that improves the processing of information.

Which of the following provides a positive form and high level of assurance?

Ans D - An audit report on external financial statements on which an adverse opinion is expressed.

The decision of whether the criteria are suitable involves considering whether the subject matter of the
assurance engagement is capable of reasonably consistent evaluation or measurement using such
criteria. Which of the following characteristics is not considered necessary in determining whether the
criteria are suitable?

Ans A – Relevance may sagot na B – neutrality.

Which of the following statements does not properly describe an element of the theoretical framework
of auditing?

Ans C - Auditors act on behalf of management

The independent auditor lends credibility to client financial statements by

Ans C - Attaching an auditor’s opinion to the client’s financial statements

The auditor’s opinion

Ans C - Is not an assurance as to the efficiency with which management has conducted the affairs of the
entity.

The market for auditing services is driven by

Ans B - A demand by external users of financial statements.

Which of the following is responsible for the fairness of representations made in financial statements?

Ans C - The client's management.

Which of the following services is the broadest and most inclusive/

Ans C - Assurance

After accepting an assurance engagement, a practitioner is not allowed to change the engagement to a
non-assurance engagement, or from a reasonable assurance engagement to a limited assurance
engagement, except when there is reasonable justification for the change.  Which of the following
ordinarily will justify a request for a change in the engagement?

I. A change in circumstances that affects the intended users’ requirements.

II.  A misunderstanding concerning the nature of the engagement.

Ans C - Both I and II

The objective of the ordinary examination of financial statements is the expression of an opinion on the
accuracy of such financial statements. 

The independent auditor’s opinion is an assurance as to the future viability of the entity.

Ans C - The first statement is false, the second statement is false

Main standards to govern review engagements

Ans B - PSREs

Assurance engagements may include

Ans A - Review engagements and examination of prospective financial information

The primary purpose of an independent financial statement audit is to

Ans D - Provide users with an unbiased opinion about the fairness of information reported in the
financial statements.

The independent auditor’s opinion helps establish the credibility of the financial statements.

The independent auditor’s opinion is an assurance as to the efficiency or effectiveness with which
management has conducted the affairs of the entity.

Ans D - The first statement is true, the second statement is false

Which of the following is broadest in scope?

Ans A - Assurance services.

A concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that
there are no material misstatements in the financial statements taken as a whole.

Ans A - Reasonable assurance

Assurance engagements may include

A.       Review engagements and examination of prospective financial information

B.       The preparation of tax returns where no conclusion conveying assurance is expressed

C.       Consulting (or advisory) engagements, such as management and tax consulting

D.      Engagements covered by Philippine Standards for Related Services, such as agreed-upon

procedures engagements and compilations of financial or other information

 Ans A - A only

The independent auditor’s responsibility in a regular audit is to express an opinion on the financial
statements.  The auditor’s opinion:

Ans C - Helps establish the credibility of the financial statements.

Which of the following statements is true concerning in an assurance engagement?

Ans A - Sufficiency is the measure of the quantity of evidence

The document defines the elements and objectives not, by itself, establish standards or provide
procedural requirements for the performance of assurance engagements.

Ans A - Philippine framework for Assurance Engagements

The characteristics for determining whether criteria are suitable include:

(1)Relevance
(2)Reliability

(3)Completeness

(4)Neutrality

(5)Comparability

(6)Feedback value

 Ans D - (1)Yes;     (2)Yes;     (3)Yes;     (4)Yes;     (5)No;     (6)No

It refers to the level of satisfaction as to reliability of an assertion being made by one party for use by
another party

Ans B - Assurance level

The type of assurance provided in a review engagement is

Ans B - Negative

Level of assurance in a review engagement

Ans D - Moderate

Assurance services may include which of the following except?

Ans D - Tax preparation services

Which of the following is least likely an application of maintaining an attitude of professional skepticism?

Ans B - In planning and performing an audit, the auditor assumes that management is dishonest.

The subject matter of an assurance engagement may take many forms, including:

(1)Nonfinancial performance or condition

(2)Behavior

(3)Financial performance or condition

(4)Physical characteristics

(5)Systems and Processes

Ans A - (1)Yes;     (2)Yes;     (3)Yes;     (4)Yes;     (5)Yes

The subject matter of an assurance engagement may take many forms including

a) Behaviour
b) Systems and processes

Ans D – All of the above

Which statement is correct regarding assurance engagements?

Ans A - It is an engagement in which a practitioner expresses a conclusion designed to enhance the

degree of confidence of the intended users other than the responsible party about the outcome of the
evaluation or measurement of a subject matter against criteria.

Objective of a review engagement (PSRE 2400)

Ans C - To enable an auditor to state whether, on the basis of procedures which do not provide all the
evidence that would be required in an audit, anything has come to the auditor’s attention that causes
the auditor to believe that the financial statements are not prepared, in all material respects, in
accordance with Philippine Financial Reporting Standards

Which one of the following is not a key attribute needed to perform assurance?

Ans D - Accounting skills

Which of the following statements is (are) true regarding the provision of assurance services?
(I) The third party who receives the assurance generally pays for the assurance received

(II) Assurance services always involve a report by one person to a third party on which an independent
organization provides assurance.

(III) Assurance services can be provided either on information or processes.

Ans C - III only

The following are the general principles governing an audit of FS Audit, except

Ans B - Professionalism

The decision as to whether the criteria are suitable involves considering whether the subject matter is
capable of reasonably consistent evaluation against or measurement using such criteria. The
characteristics for determining whether criteria are suitable include the following except

Ans D - Sufficiency

Which of the following statements is correct?

Ans C - In prospective financial information, forecasts primarily relate to expected events while
projections primarily relate to events based on hypothetical assumptions.

Elements of Assurance Engagements - Assessment

In performing an attestation engagement, a CPA typically

Ans C - Expresses a conclusion about an assertion

Which of the following is not one of the elements of an assurance engagement?

Ans D - An opinion about whether the subject matter conforms, in all material respects, with the
identified criteria.

Which of the following is not a component of assurance services?

Ans C - A user or a group of users who derive value from the service provided.

Which of the following statements is (are) true regarding the provision of assurance services?

I.      The third party who receives the assurance generally pays for the assurance received

II.     Assurance services always involve a report by one person to a third party on which an independent
organization provides assurance.

III.   Assurance services can be provided either on information or processes. 

Ans C - III only

Subject matter of an assurance engagement may take many forms including

(1) Data     (2) Systems     (3) Behavior

Ans A - (1)Yes;     (2)Yes;     (3)Yes

Which of the following elements is most likely to be a component of a direct reporting assurance
engagement?

Ans D - Auditor independence

Which of the following is incorrect regarding the three party relationship element of assurance
engagement?

Ans C - The responsible party may not be the party who engages the professional accountant.

Which of the following is an example of an assurance engagement?

Ans B - Reporting on financial statements prepared using other comprehensive basis of accounting.
Which of the following is incorrect regarding the three party relationship element of assurance
engagement?

a) The intended user is generally the addressee of the professional accountant’s report.
b) The responsible party and the intended user will often be from separate organizations.
c) The responsible party may also be one of the intended users.

Ans D - All of the above statements are correct

The decision of whether the criteria are suitable involves considering whether the subject matter of the
assurance engagement is capable of reasonably consistent evaluation or measurement using such
criteria. Which of the following characteristics is not considered necessary in determining whether the
criteria are suitable?

Ans B - Neutrality

All assurance engagements contain five basic elements.  Which of the following is not one of these
elements?

Ans C - Engagement acceptance

In an assurance engagement, the outcome of the evaluation or measurement of a subject matter against
criteria is called

Ans A - Subject matter information

Suitable criteria are required for reasonably consistent evaluation or measurement of the subject matter
of an assurance engagement.  Which of the following statements concerning the characteristics of
suitable criteria is correct?

Ans C - Neutral criteria contribute to conclusions that are free from bias.

Types of Assurance Engagements - Assessment

The objective of an agreed-upon procedures engagement

Ans C - Is to carry out those procedures of an audit nature to which the auditor and the entity and any
appropriate third parties have agreed and to report on factual findings.

Which of the following services provides a moderate level of assurance about the client’s financial
statements?

Ans C - Review

Which of the following services is the broadest and most inclusive?

Ans C - Assurance

What are the three most commonly sought assurance services?

Ans C - Audits, reviews and other assurance services

Which of the following is not an assurance service?

Ans D - Compilation of financial information

Which of the following statements best describes assurance services?

Ans A - Independent professional services that are intended to enhance the credibility of information to
meet the needs of an intended user.

In an assurance engagement, the outcome of the evaluation or measurement of a subject matter against
criteria is called

Ans A - Subject matter information

What type of assurance engagement is involved when the practitioner expresses a negative form of
conclusion?

Ans D - Limited assurance engagement

Which of the following audits can be regarded as being solely a “compliance” audit?

Ans A - BIR examiners’ examinations of the returns of taxpayers

Which statement is incorrect regarding related services?

Ans D - In a consultancy engagement, the accountant is engaged to use accounting expertise as opposed
to auditing expertise to collect, classify and summarize financial information.

The following are assurance engagements, except

Ans D - Tax services

CPAs engaged in public accounting practice render services in the following areas except

Ans D - Internal auditing

In some assurance engagements, the evaluation or measurement of the subject matter is performed by
the responsible party, and the subject matter information is in the form of an assertion by the
responsible party that is made available to intended users.  These engagements are called

Ans B - Assertion-based engagements

The framework for auditing and related services as addressed by PSA excludes

Ans B - Tax services

According to PSA 120, which of the following is an appropriate combination of procedures required in
completing a review engagement

Ans B - Inquiry and analytical procedures

What type of assurance engagement is involved when the practitioner expresses a positive form of
conclusion?

Ans C - Reasonable assurance engagement

The Framework of PSA (PSA 120) applies to

Ans C - Agreed upon procedures

Absolute assurance is generally not attainable as a result of such factors as:

(1)The use of testing

(2)The inherent limitations of internal control system

(3)The use of judgment

(4)Most audit evidence are persuasive rather than conclusive

Ans C - (1)Yes;     (2)Yes;     (3)Yes;     (4)Yes

Engagements frequently performed by professional accountants that are not assurance engagements
include the following, except

Ans B - Reasonable assurance engagement

Different government agencies influence the practice of accountancy in the Philippines.  Which of the
following statements is correct?

Ans A - The Commission on Audit (COA) is principally tasked to keep the general accounts of the
government and preserve the vouchers and supporting papers thereto, and promulgate accounting and
auditing rules and regulations including those for the prevention and disallowance of irregular,
unnecessary, excessive, extravagant or unconscionable expenditures, or uses of government funds and
properties.

Auditing: Nature , Philosophy and Objectives

Which of the following best describes why an independent auditor is asked to express an opinion on the
fair presentation of financial statements?
Ans C - The opinion of an independent party is needed because a company may not be objective with
respect to its own financial statements.

The independent auditor’s responsibility in a regular audit is to express an opinion on the financial
statements. The auditor’s opinion;

Ans C - Helps establish the credibility of the financial statements

An audit of the financial statements of Camden Corporations being conducted by an external auditor.
The external auditor is expected to

Ans A - Express an opinion as to fairness of Camden’s financial statements.

The primary reason for an audit by  an independent, external audit firm is to

Ans D - Provide increased assurance to users as to the fairness of the financial statements

The primary objective of the ordinary examination of financial statements by a CPA is the expression of
an opinion.

Ans D - The fairness with the financial statements present financial position and results of operations

Auditing is a systematic process that includes all of the following except:

Ans C - Providing important managerial decisions for client

Types of Audit - Assessment

Not one of the three phases in an operational audit

Ans B - Review of internal control

Not a main objective of operational audit

Ans D - To recommend the use of information

Users of the audit report can reasonably expect the audited financial statements to be

Ans B - Presented fairly according to the substance of GAAP

Which statement/s is correct (PSA 610)?

I.         An internal audit function is not independent of the entity irrespective of its degree of autonomy
and objectivity.

II.       The external auditor has sole responsibility for the opinion expressed on the financial statements
of an entity even in the presence of an                  entity’s internal audit function.

III.     The external auditor’s responsibility for the opinion may be reduced by the external auditor’s use
of the work of internal auditors.

Ans B - I and II only

Internal audit department should be responsible to

Ans B - Both the audit committee and senior mgt.

Widely-accepted established framework in evaluating the effectiveness of internal control is that of

Ans B - COSO

An audit committee in an entity is composed of outside directors who must be independent of

management. Which of the following qualifies?

Ans C - Retired executive from a different company

 Usually an operational audit is performed

Ans D - By internal auditors at the request of top management or the board of directors.
Determines the objectives of an internal audit function

Ans C - Management

Internal auditing relates to an

Ans D - Audit which serves the needs f management

This audit involves a study of a specific unit of an organization for the purpose of measuring its
performance.

Ans B - Operational

An audit designed to determine to extent to which the desired results of an activity established by the
legislative or other authorizing body are being achieved.

Ans B - Program results audit

Internal auditors review the adequacy of the company’s internal control system primarily to

Ans B - Determine whether the internal control system provides reasonable assurance that the
company’s objectives and he goals are met efficiently and economically

Criteria in operational audits are normally objectives set by

Ans C - The Board of Directors

An objective of operational audit is to assess whether

Ans C - Specific units of the entity are functioning effectively and efficiently

Describe operational audit.

Ans C - It focuses on finding aspects of operations where controls could be implemented to reduce
operational waste

This audit involves examination and evaluation of an agency’s costs and outputs of a specific
activity/program and its benefits and effects and determining whether these achieve the intent of the
legislation that established the program.

Ans A - Program audit

This audit uses laws and regulations as its established criteria.

Ans D - Compliance

Internal auditing encompasses

Ans B - Both financial and operational auditing

Per Glossary of Terms (PSA), it is defined as an appraisal activity established or provided as a service to
the entity.

Ans C - Internal audit function

Independence of the internal auditors would be least likely achieved if internal auditors report to the

Ans B - Controller

Per Glossary of Terms (PSA), functions of internal auditing include, among other things, examining,
evaluating and monitoring the adequacy and effectiveness of

Ans A - Internal control

Per Corporation Code of the Philippines Section 35, the by-laws of a corporation may create an
executive committee composed of not less than how many members?

Ans A - 3

Since the main goal in fraud audit is not assurance but rather an investigation of anomalies, this is of
least concern.

Ans D - Materiality
A primary purpose of an operational audit is to provide 

Ans C - A measure of management performance in meeting organizational goal.

Internal auditing provides assistance primarily to

Ans C - Management and Board of Directors

Can perform fraud audit

Sol.

a) External auditor
b) Internal auditor

Ans C - Both A and B

Not belonging to the group of audits below

Ans D - Compliance

It usually includes the components of compliance, performance and financial statements audit

Ans C - Comprehensive audit

Least likely an objective of operational audit

Ans B - Increased reliability of financial reporting

The best description f the scope of internal auditing is that it encompasses

Ans B - Both financial and operational auditing

Types of Auditors

Internal auditors review the adequacy of the company’s internal control system primarily to

Ans B - Determine whether the internal control system provides reasonable assurance that the
company’s objectives and he goals are met efficiently and economically 

Which of the following best describes an auditor’s professional skepticism?

Ans C - Auditors should make a critical assessment, with an inquisitive mind, of the sufficiency and
appropriateness of audit evidence obtained.

What are the two most important qualities for an operational auditor

Ans C - Competence and technical training

The independent auditor’s opinion helps establish the credibility of the financial statements.

The independent auditor’s opinion is an assurance as to the efficiency or effectiveness with which
management has conducted the affairs of the entity.

Ans D - The first statement is true, the second statement is false

Philippine Standards On Auditing And Quality Control

General Standards - Assessment

The General Standards stress the importance of:

Ans B - personal qualities the auditor should possess.

The generally accepted auditing standard that requires “Adequate technical training and proficiency” is
normally interpreted as requiring the auditor to have:
Ans A - formal education in auditing and accounting.

Which one of the following is not one of the three General Standards?

Ans A - Proper planning and supervision.

Standards of Field Work - Assessment

Which one of the following is not a Field Work Standard?

Ans B - Due professional care.

Which of the following statements most accurately captures the intent of the standards of field work?

Ans C - Field work standards are primarily directed at the auditor’s planning, understanding of internal
control, and evidence accumulation.

The objective of the consistency standard is to provide assurance that

Ans D - The comparability of financial statements between periods in not materially affected by changes
in accounting principles without disclosure

The auditor’s judgment concerning the overall fairness of presentation of financial position, results of
operations, and changes in cash flow is applied within the framework of:

Ans D - generally accepted accounting principles.

Standards of Reporting - Assessment

The objective of the consistency standard is to provide assurance that

Ans D - The comparability of financial statements between periods in not materially affected by changes
in accounting principles without disclosure

The auditor’s judgment concerning the overall fairness of presentation of financial position, results of
operations, and changes in cash flow is applied within the framework of:

Ans D - generally accepted accounting principles.

Philippine Standards on Auditing - Assessment

The Philippine Standards on Auditing issued by AASC

Ans A - Apply to independent examination of financial statements of any entity when such an
examination is conducted for the purpose of expressing an opinion thereon.

A CPA firm offers management advisory services to clients. Its primary purpose is to

Ans A - Furnish  professional  advice  and  assistance  which  will  enable  the  client  to  improve
operations.

Which of the following is not normally a service rendered by public accountants?

Ans C - Internal auditing

These statements are issued to provide practical assistance to auditors in implementing the PSAs

Ans C - PAPS

An audit involves ascertaining the degree of correspondence between assertions and established
criteria. In the case of financial statement audit, which of the following is not a valid criterion?

Ans D - Philippine Standards on Auditing.

According to Philippine Standard on Auditing, the procedures employed in doing compilation are:

Ans C - Not designed to enable the accountant to express any form of assurance

The following statements relate to the accounting profession:

I.         To merit public trust and confidence, the professional person must convince the public that he will
place public service ahead of personal reward.

II.       A CPA certificate is evidence of basic competence in the discipline of accounting at the time the
certificate is granted.

III.     A code of professional conduct is one of the most important distinguishing characteristics of a
profession.

State whether the foregoing statements are true or false.

Ans A - All of the statements are true.

An audit involves ascertaining the degree of correspondence between assertions and established
criteria. In the case of financial statement audit, which of the following is not a valid criterion?

Ans D - Philippine Standards on Auditing.

Elements of a System of Quality Control - Assessment

A quality control policy that requires personnel in the firm to adhere to independence, integrity,
objectivity, confidentiality and professional behavior, relates to

Ans A - Professional Requirements

Which of the following is an element of a CPA firm’s quality control system that should be considered in
establishing its quality control policies and procedures?

Ans C - Assigning personnel to engagements

The main purpose of implementing quality control policies and procedures is:

Ans B - To provide reasonable assurance that audit will be conducted in accordance with PSA.

This involves informing assistants of their responsibilities and the objectives of the procedures they are
to perform. It also involves informing them of matters such as the nature of the entity’s business and
possible accounting  and auditing problems that may affect the nature, timing and extent of audit
procedures with which they are involved.

Ans B - Direction

Which of the following quality control objectives would be least important to the auditor?

Ans C - Determination of audit fee.

This involves informing  assistants of their responsibilities and the objectives of the procedures they are
to perform. It also involves informing them of matters such as the nature of the entity’s business and
possible accounting  and auditing problems that may affect the nature, timing and extent of audit
procedures with which they are involved.

Ans B - Direction

In pursuing a CPA firm’s quality control objectives, a CPA firm may maintain records indicating which
partners or employees of the CPA firm were previously employed by the CPA firm’s clients. Which
quality control element would this be most likely to satisfy?

Ans C - Independence

Which of the following is not one of the major concerns of the auditor when establishing quality control
policies and procedures?

Ans D - Billing arrangements

In making a decision to accept or continue with a client, the auditor should consider:

(1) Its Competence

(2) Its own independence

(3) Its ability to service the client properly

(4) The integrity of the client’s management

Ans A - (1) Yes;     (2) Yes;     (3) Yes;     (4) Yes

The nature and extent of a CPA firm’s quality control policies and procedures depend

1)   The CPA Firm’s Size

2)   The nature of the CPA Firm’s Practice

3)   Cost-benefit considerations

 Ans A - 1)   Yes       2)   Yes       3)   Yes

The nature and extent of a CPA firm’s quality control policies and procedures depend on

1)   The CPA firm’s size

2)   The nature of CPA firm’s Practice

3)   Cost-benefit considerations

Ans A - 1)   Yes       2)   Yes       3)   Yes

Quality control policies and procedures should be implemented at

(1) Level of the audit firm

(2) Individual audits

Ans B - (1) Yes;     (2) Yes

The following statements relate to quality control for audit work. Which statement is false?

Ans A - According to PSA 220, audit firms should adopt standardized quality control policies and
procedures.

The primary purpose of establishing quality control policies and procedures for deciding whether to
accept a new client is to

Ans C - Minimize the likelihood of association with clients whose management lacks integrity.

In pursuing the firm’s quality control objectives with respect to assigning personnel to engagements, the
auditors may use policies and procedures such as

Ans B - Requiring timely identification of the staffing requirements of specific engagements so that
enough qualified personnel can be made available.

The objective of the quality control policies to be adopted by an audit firm will ordinarily incorporate all
of the following except:

Ans A - Risk assessment

The objectives of the quality control policies to be adopted by the audit firm will ordinarily incorporate:

(1) Human Resource

(2) Monitoring

(3) Ethical Requirements

Ans B - (1) Yes;     (2) Yes;     (3) Yes

 In compliance with the element of human resources, the firm should address issues relating to

Ans B - assignment of engagement teams

The firm should establish policies and procedures designed to promote an internal culture based on the
recognition that quality is essential in performing engagements. Such policies and procedures should
require the firm’s chief executive officer (or equivalent) or, if appropriate, the firm’s managing board of
partners (or equivalent), to assume ultimate responsibility for the firm’s system of quality control.

Ans D - Leadership responsibilities for quality within the firm

Which of the following is one of the elements of a CPA firm’s quality control system?

Ans C - Leadership responsibilities

Elements of a CPA firm’s quality control that should be considered in establishing its quality control
policies and procedures must include:

1)   Monitoring

2)   Ethical Requirements

3)   Engagement Performance

Ans A - 1)   Yes       2)   Yes       3)   Yes

In making a decision to accept or retain a client, the firm should consider all of the following except

Ans D - The type of opinion to be issued

In connection with the element of monitoring, a CPA firm’s system of quality control should ordinarily
provide for the maintenance of

Ans C - Documentation to demonstrate compliance with its policies and procedures.

Which of the following is one of the elements of a CPA firm’s quality control system?

Ans C - Delegation

A CPA firm’s quality control procedure pertaining to the acceptance of a prospective audit client would
most likely include

Ans A - Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily.

Which of the following is an element of a CPA firm’s quality control system that should be considered in
establishing its quality control policies and procedures?

Ans C - Independence

Quality Control Review - Assessment

Which of the following quality control procedures is a monitoring activity?

Ans B - Reviews  and  tests  compliance  with  the  firm’s  general  quality  control  policies  and
procedures.

Acceptance and continuance of client relationships and specific audit engagements include considering
all of the following, except:
Ans D - Whether the internal control of the client is adequate enough to detect and prevent material
misstatements in the financial statements.

Monitoring, as an element of quality control policies of a firm, requires:

Ans A - Providing  reasonable  assurance  that  the  firm’s  other  quality  control  policies  and
procedures are effectively operating.

The work performed by the assistants should be reviewed by personnel of at least equal competence to
consider all of the following except:

Ans D - The engagement personnel maintained independence in the performance of the examination.

It is the process designed to provide an objective evaluation, before the auditor’s report is issued, of the
significant judgments the engagement team made and the conclusions they reached in formulating the
auditor’s report:

Ans B - Engagement quality control review

The examination by CPAs of a CPA firm’s auditing practices to ascertain compliance with its quality
control system

Ans B - Peer review

According to PSA 220, who should take responsibility for the overall quality on each audit engagement?

Ans C - engagement partner assigned to the engagement

Auditor's Responsibility

Definition of Error - Assessment

Which of the following most accurately summarizes what is meant by the term “material
misstatement”?

Ans C - Material error, material fraud, and certain illegal acts

Which of the following is a category of risk factors that should be considered in relation to
misstatements arising from misappropriation of assets?

Ans D - controls

Material misstatements may emanate from all of the following except:

Ans D - limitations of the audit

Fraudulent financial reporting involves intentional misstatements including omissions of amounts or

disclosure in financial statements to deceive financial statement users. It may be accomplished in a
number of ways, including:

Ans D - Manipulation, falsification, r alteration of accounting records or supporting documentation from

which the financial statements are prepared

When the auditor believes a misstatement is or may be the result of fraud but that the effect of the
misstatement is not material to the financial statements, which of the following steps is required?

Ans A - Consider the implications for other aspects of the audit.

The likelihood of detecting error is ordinarily higher than that of detecting fraud because

Ans C - Fraud is usually accompanied by acts designed to conceal its existence

Which of the following is an example of fraud?

Ans D -  misappropraition of assets or group of assets

The risk of fraudulent financial reporting increases in the presence of?

Ans A - Incentive systems based on operating income

When performing a financial statement audit, auditors are required to explicitly assess the risk of
material misstatement due to?

Ans B - Fraud

The primary factor that distinguishes errors from fraud is 

Ans D - whether the underlying cause of misstatement is intentional or unintentional

Which of the following is a commission of misappropriation of assets (employee fraud)?

Ans D - Using an entity’s assets for personal use (for example, using the entity’s assets as collateral for a
personal loan or a loan to a related party)

Which of the following would be classified as an error?

Ans D - Misinterpretation by management of facts that existed when the financial statements were
prepared

Which of the following is most likely to be considered a risk factor relating to fraudulent financial
reporting?

Ans C - Negative cash flows from operations

Which of the following best describes what is meant by the term “fraud risk factor”

Ans B - Factors whose presence often have been observed in circumstances where frauds have occurred

Which of the following is a commission of fraudulent financial reporting (management fraud)?

Ans D - Recording fictitious journal entries, particularly close to the end of an accounting period, to
manipulate operating results or achieve other objectives

Which of the following is an example of an error?

Ans D - Oversight that resulted in an incorrect accounting estimates

The term “error” refers to unintentional misrepresentation of financial information. Examples of errors
are when

   I     Assets have been misappropriated

   II   Transactions without substance have been recorded

   III  Records and documents have been manipulated and falsified

   IV  The effects of the transactions have been omitted from the records

Ans C - all of the above statements are false

Which of the following is most likely to be presumed to represent fraud risk on an audit?

Ans B - Improper revenue recognition

Which of the following is an example of fraudulent financial reporting?

Ans A - Company management changes inventory count tags and overstates ending inventory, while
understating cost of goods sold

Per PSA 240, these are events or conditions that indicate an incentive or pressure to commit fraud or
provide an opportunity to commit fraud.

Ans A - Fraud risk factors

Which of the following is most likely to be an example of fraud?

Ans A - Defalcations occurring due to invalid electronic approvals

The term “fraud” refers to an intentional act by one or more individuals among management, those
charged with governance, employees, or third parties, involving the use of deception to obtain an unjust
or illegal advantage.  Which statement is correct regarding fraud?

Ans B - Misstatement of the financial statements may not be the objective of some frauds
Per PSA 240, it involves intentional misstatements including omissions of amounts or disclosures in
financial statements to deceive financial statement users.

Ans A - Fraudulent financial reporting

An attitude that includes a questioning mind and a critical assessment of audit evidence is referred to as

Ans B - Professional scepticism

Which of the following is least likely a fraud risk factor?

Ans A - The accounting department is overstaffed

The primary factor that distinguishes errors from fraud is? 

Ans D - whether the underlying cause of misstatement is intentional or unintentional

Not included in the fraud triangle 

Ans D - Fraud risk factor

Which of the following statements is true?

Ans B - It is usually easier for the auditor to uncover errors than fraud

When considering fraud risk factors relating to management’s characteristics, which of the following is
least likely to indicate a risk of possible misstatement due to fraud?

Ans D - Use of unusually conservative accounting practices

Which of the following statements best describes the auditor’s responsibility to detect conditions
relating to financial stress of employees or adverse relationships between a company and its
employees?

Ans D - The auditor is not required to plan the audit to discover these conditions, but should consider
them if he or she becomes aware of them during the audit.

“Error includes ”

Ans C - An incorrect accounting estimate arising from oversight or misinterpretation of facts

The most difficult type of misstatement to detect is fraud based on

Ans B - The nonrecording of transactions

“Error” includes

Ans C - An incorrect accounting estimate arising from oversight or misinterpretation of facts.

Which of the following most accurately summarizes what is meant by the term “material
misstatement?”

Ans C - Material error, material fraud, and certain illegal acts

Per PSA 240, it involves the theft of an entity’s assets and is often perpetrated by employees in relatively
small and immaterial amounts.

Ans B - Misappropriation of assets

Which of the following statements best identifies the two types of fraud?

Ans D - fraudulent financial reporting and misappropriation of assets

Which of the following statements about fraud or error is incorrect?

Ans D - the likelihood of detecting fraud is ordinarily higher than that of detecting error

Which of the following factors would most likely heighten an auditor’s concern about the risk of
fraudulent financial reporting?

Ans D - An overly complex organizational structure involving unusual lines of authority

Fraudulent financial reporting is often called:

Ans A - Management fraud

Which of the following factors or conditions is an auditor least likely to plan an audit to discover?

Ans A - Financial pressures affecting employees

Misstatements in the financial statements can arise from fraud or error.  The distinguishing factor
between fraud and error is whether the underlying action that results in the misstatement of the
financial statements is

I.      Intentional or unintentional.

II.     Rational or irrational.

Ans A - I only

Definition and Types of Fraud - Assessment

In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud
is

Ans B - Greater for management fraud because of management’s ability to override existing internal
controls, which is always assumed an audit.

Communication of a misstatements resulting from fraud, or error to the appropriate level of

management on a timely basis is important because it enables management to take action as necessary.
Ordinarily, the appropriate level of management is

Ans A - At least equal to level of persons who appear to be involved with misstatements or suspected
fraud

S1       The risk of not detecting a material misstatement resulting from fraud is higher than the risk of
not detecting one resulting from error.

S2       The risk of the auditor not detecting a material misstatement resulting from management fraud is
greater than for employee fraud.

S3.      The auditor recognizes the fact that audit procedures that are effective for detecting error may
not be effective in detecting fraud

Ans A - True True True

Fraudulent financial reporting is often called

Ans A - Management fraud

Which of the following is an example of fraud?

Ans D - Misappropriation of assets or group of assets.

Which of the following conditions identified during fieldwork of an audit is most likely to affect the
auditor’s assessment of the risk of misstatement due to fraud?

Ans C - Missing documents

Which of the following is least likely a fraud risk factor?

Ans A - The accounting department is overstaffed or D - There are frequent changes of auditors and
lawyers

Based on PSA 240 (Revised 2005), in a financial statement audit, the auditor should consider categories
of fraud risk factors relating to misstatements arising from (1) fraudulent financial reporting and (2)
misappropriation of assets.  Which of the following is not a category of fraud risk factors in relation to
misstatements arising from misappropriation of assets?

Ans D -  Controls
Management has the responsibility to detect and prevent misstatements due to fraud and error.  This
responsibility is accomplished through

Ans C - Implementing adequate accounting and internal control systems

Professional skepticism requires that an auditor assumes that management is

Ans C - Neither honest nor dishonest

The subsequent discovery of material misstatement of the financial statements resulting from fraud or
error, in and of itself, indicates:

1)a failure to obtain reasonable assurance

2)Inadequate planning, performance or judgment

3)the absence of professional competence and due care

Ans D - 1)   no       2)   no       3)   no

The auditor is most likely to presume that a high risk of defalcation exists if

Ans C - Inadequate segregation of duties places an employee in a position to perpetrate and conceal
fraud

Which of the following statements is true?

Ans B - is usually easier for the auditor to uncover errors than fraud.

The auditor has considerable responsibility for notifying users as to whether or not the statements are
properly stated. This responsibility imposes upon the auditor a duty to

Ans D - provide reasonable assurance that material misstatements will be detected

The management responsibility to detect and prevent fraud and error is accomplished by

Ans C - Establishing a control environment and implementing adequate internal control policies and
procedures

Given that an audit in accordance with generally accepted auditing standards is influenced by the
possibility of material errors and fraud, the auditor should conduct the audit with an attitude of

Ans D - professional skepticism. Or A Professional Responsiveness

Which of the following best describes what is meant by the term “fraud risk factor”?

Ans B - Factors whose presence often have been observed in circumstances where frauds have occurred

Which of the following characteristics most likely would heighten an auditor’s concern about the risk of
intentional manipulation of financial statements?

Ans C - Management places substantial emphasis on meeting earnings projections

Which of the following statements is incorrect?

Ans B - The auditor is not and can not be held responsible for the detection of fraud or error

Fraudulent financial reporting involves intentional misstatements including omissions of amounts or

disclosures in financial statements to deceive financial statement users.  It may be accomplished in a
number of ways, including

Ans D - Manipulation, falsification, or alteration of accounting records or supporting documentation

from which the financial statements are prepared.

The types of intentional misstatements that are relevant to the auditor’s consideration of fraud include

I.    Misstatements resulting from fraudulent financial reporting

           II.         Misstatements resulting from misappropriation of assets

Ans A -  I and II
Fraud involving one or more members of management or those charged with governance is referred to
as

Ans A - Management fraud.

Auditing standards require that auditors be aware of relevant factors relating to fraud.  Which of the
following statements about fraud is false?

Ans C - Fraud involves actions of management but excludes the actions of employees or third parties

Should the auditor uncover circumstances during the audit that may cause suspicions of management 
fraud, the auditor must

Ans C - evaluate their implications and consider the need to modify audit procedures

When the auditor identifies a misstatements in the financial statements, the auditor should consider
whether such a misstatement may be indicative of fraud and if there is such an indication, the auditor
should

Ans A - Consider the implications of the misstatement in relation to other aspects of the audit

The auditor’s ability to detect a fraud depends on factors such as 

         I.     The skillfulness of the perpetrator

        II.     The frequency and extent of manipulation

      III.     The degree of collusion involved

       IV.     The relative size of individual amounts manipulated

                            The seniority of those involved

Ans A - All of the above

The  responsibility for the detection and prevention of errors, fraud and noncompliance with laws and
regulations rests with

Ans D - management and those charged with governance

Which of the following conditions are generally present when misstatements due to fraud occur?

I.      Incentive or pressure.

II.     Perceived opportunity.

III.    Rationalization.

Ans D - I, II, and III.

Which of the following relatively small misstatements most likely could have a material effect on an
entity’s financial statements?

Ans A - An illegal payment to a foreign official that was not recorded

Fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosure

in the financial statements to deceive financial statements users.  Fraudulent financial reporting least
likely involve

Ans D - Embezzling receipts, stealing physical or intangible assets, or causing an entity to pay for goods
and services not received

Which of the following statements best describes an auditor’s responsibility regarding misstatements?

Ans A - An auditor should obtain reasonable assurance that the financial statements taken as a whole
are free from material misstatement, whether caused by fraud or error

Per PSA 240, what separates error from fraud?

Ans B – Intention
If the auditor is unable to determine whether fraud or error has occurred because of limitations
imposed  by the circumstances, the auditor would most likely issue a report that contains:

Ans C - a qualified opinion 

Which of the following is a commission of fraudulent financial reporting (management fraud)?

Ans A - Embezzling receipts (for example, misappropriating collections on accounts receivable or

diverting receipts in respect of written-off accounts to personal bank accounts)

In distinguishing between the detection of a material management fraud and an equally material error,
audits

Ans B - cannot be expected to provide the same degree of assurance

The auditor is concerned with fraud that causes a material misstatement in the financial statements. 
There are two types of intentional misstatements that are relevant to the auditor: misstatements
resulting from fraudulent financial reporting and misstatements resulting from

Ans C - Misappropriation of assets.

The primary difference between financial statement errors and fraud is that

Ans B - errors are unintentional mistake or omissions, while fraud involves intentional misstatements.

Management's and Auditor's Responsibility - Assessment

Audits of financial statements are designed to obtain assurance of detecting material misstatements due
to

1)Errors

2)Fraudulent financial reporting

3)Misappropriation of assets

Ans A - 1)   yes       2)   yes       3)   yes

An auditor should recognize that the application of auditing procedures may produce evidential matter
indicating the possibility of errors and irregularities and therefore should

Ans C - Plan and perform the engagement with an attitude of professional skepticism.

Which of the following factors is most important concerning an auditor's responsibility to detect errors
and irregularities?

Ans D - The risk that mistakes, falsifications, and omissions may cause the financial statements to
contain material misstatements.

Communication of a misstatement resulting from fraud, or a suspected fraud, or error to the

appropriate level of management on a timely basis is important because it enables management to take
action as necessary.  Ordinarily, the appropriate level of management is

Ans B - At least one level above persons who appear to be involved with the misstatement or suspected
fraud

The auditor may encounter exceptional circumstances that bring into question the auditors ability to
continue performing the audit, including where

Ans B - The auditor’s consideration of the risk of material misstatement resulting from fraud and the
results of audit tests indicate a significant risk of material and pervasive fraud

When planning and performing audit procedures and evaluating and reporting the results thereof, the
auditor should

Ans D - Consider the risk of material misstatements in the financial statements resulting from fraud

The  responsibility for the detection and prevention of errors, fraud and noncompliance with laws and
regulations rests with
Ans D - management and those charged with governance

The management responsibility to detect and prevent fraud and error is accomplished by

Ans C – Establishing a control environment and implementing adequate internal control policies and

procedures.

Whether the auditor has performed an audit in accordance with PSAs is determined by

Ans A - The adequacy of the audit procedures performed in the circumstances and the suitability of the
auditor’s report based on the result of these procedures

Auditing standards require that auditors be aware of relevant factors relating to fraudulent reporting.
Which of the following statements is false concerning fraudulent reporting?

Ans C - Fraud involves actions of management but excludes the actions of employees or third parties.

When fraud has been identified, CPA responsibility consists of

Ans D -  Determination of its extent.

Which statement is incorrect regarding the auditor’s responsibility to consider fraud and error in an
audit of financial statements?

Ans C - The auditor should design test of control to reduce to an acceptably low level the risk that
misstatements resulting from fraud and error that are material to the financial statements taken as a
whole will not be detected

The primary responsibility for the prevention and detection of fraud and error rests with.

Choices:

a) The auditor
b) Those charged with governance
c) The management of an entity

Ans D - Both b and c

The management responsibility to detect and prevent fraud and error is accomplished by

Ans B - The auditor planned the work in a hasty and inefficient manner.

Definition of Non-compliance - Assessment

S1       The auditor is not responsible for preventing non-compliance and cannot be expected to detect
noncompliance with all laws and regulations.

S2       Whether an act constitutes non-compliance is ultimately a matter of professional judgment.

S3       Non-compliance refers to acts of omission or commission by the entity, either intentional or
unintentional, which are contrary to the prevailing laws or regulations. Non-compliance does not include
personal misconduct by those charged with governance, management or employees of the entity.

Ans B - 1)   True       2)   False       3)   True

Based on PSA 250, noncompliance refers to

Ans D - acts of omission or commission by the client which are contrary to prevailing laws and
regulations

The responsibility for the prevention and detection of noncompliance rests with

Ans C - Management.

The following may indicate non-compliance, except

Ans D - Payments with proper exchange control documentation

According to PSA 250, the risk of not detecting material misstatement due to noncompliance is high.
This  can be attributed to all of the following factors, except:

Ans B - The detection prevention and detection of noncompliance rests with management.
Which of the following is not true about the auditor’s consideration of compliance with laws and
regulations?

Ans D - The auditor should obtain oral representation that management has disclosed to the auditor all
known actual or possible noncompliance with laws and regulations.

To obtain general understanding about the law’s and regulations affecting the client’s business, the
auditor would least likely

Ans D - Obtain a lawyer’s representation letter.

According to PSA 250, the term “noncompliance” as used in the standard refers to acts of omission or
commission by the entity being audited, either intentional or unintentional, which are contrary to the
prevailing laws or regulations.  Such acts do not include

Ans D - Personal misconduct (unrelated to the entity’s business activities) by the entity’s management or
employees.

Management's and Auditor's Responsibility - Assessment

During the annual audit of Ajax Corp., a publicly held company, Jones, CPA, a continuing auditor,
determined that illegal political contributions had been made during each of the past seven years,
including the year under audit. Jones notified the board of directors about the illegal contributions, but
they refused to take any action because the amounts involved were immaterial to the financial
statements. Jones should reconsider the intended degree of reliance to be placed on the

Ans C - Management representation letter

Communication of a misstatements resulting from fraud, or error to the appropriate level of

management on a timely basis is important because it enables management to take action as necessary.
Ordinarily, the appropriate level of management is

Ans A - At least equal to level of persons who appear to be involved with misstatements or suspected
fraud

Which of the following is true?

Ans C - Auditors must specifically consider fraud risk from management override of controls.

Auditing standards regarding the detection of indirect-effect illegal acts clearly state that the auditor
provides

Ans D - No assurance that they will be detected

With respect to errors and fraud, the auditors should plan to

Ans B - discover errors of fraud that would have a material effect on the financial statements.

The primary responsibility for the prevention and detection of fraud error rests with.

Ans B - Those charged with governance

What is an auditor’s responsibility who discovers management involved in what is financially immaterial
fraud?

Ans A - Report the fraud to the audit committee.

Which of the following should the auditor likely to do when the application of planned audit procedures
indicates the possible existence of fraud or error?

Ans C - He should consider the potential effect on the financial statements

If there is fraud involving the collusion of several employees that includes the falsification of documents,
the chance that such a fraud would be uncovered in a normal audit is

Ans B - Unlikely

Which of the following is least likely to be required on an audit?

Ans D - Make a legal determination of whether fraud has occurred.

Which of the following is most likely to be a response to the auditor’s assessment that the risk of
material misstatement due to fraud for the existence of inventory is high?

Ans B - Perform analytical procedures rather than taking test counts. Or D - Observe test counts of
inventory at certain locations on an unannounced basis.

Philippine Standards on Auditing require auditors to assess the risk of material misstatement due to
fraud

Ans A - for every audit

Which of the following statements is correct relating to the auditor’s consideration of fraud?

Ans A - The auditor’s interest in fraud consideration relates to fraudulent acts that cause a material
misstatement of financial statements.

The most likely explanation why the auditor’s examination cannot reasonably be expected to bring all
illegal acts by the client to the auditor’s attention is that

Ans B - Illegal acts by clients often relate to operating aspects rather than accounting aspects.

Warning signs that cause the auditor to question management integrity must be taken seriously and
pursued vigorously. Which of the following may lead the auditor to suspect management dishonesty?

Ans A - The president and chief executive officer of the client corporation has held numerous meetings
with the controller for the purpose of discussing accounting practices that will maximize reported
profits.

An auditor who discovers that a client’s employees have paid small bribes to public officials most likely
would withdraw from the engagement if the

Ans C - Employees’ actions affect the auditor’s ability to rely on management’s representations or D
Notes to the financial statements fail to disclose the employees’ actions

On fraud consideration, which of the following is least correct?

Ans B - The auditor is not responsible for the prevention of fraud, but he is responsible for the detection
and correction of fraud through effective auditing procedures.

If specific information comes to an auditor’s attention that implies the existence of possible illegal acts
that could have a material, but indirect effect on the financial statements, the auditor should next

Ans A - Apply audit procedures specifically directed to ascertaining whether an illegal act has occurred.

Auditor responsibility for identifying “direct effect” illegal acts differs from their responsibility for
detecting

Ans B - indirect-effect illegal acts.

The following are examples of circumstances that may indicate the possibility that the financial
statements may contain a material misstatement resulting from fraud, except

Ans C - Usual delays by the entity in providing requested information

Which of the following illegal acts should an audit be designed to obtain reasonable assurance of
detecting?

Ans B - Accrual and billing of an improper amount of revenue under government contracts

Whom should auditors contact when they suspect a fraud?

Choices:

a) Senior management
b) Expected perpetrators of the fraud
c) Audit committee of the board of directors

Ans D - a and c
When the auditor discovers fraud which is immaterial in amount, the auditor shall

Ans C - Consider the implications of the fraud to the other aspects of the audit

Which of the following parties is least likely to uncover fraud?

Ans A - External auditors

Which of the following is most likely to be an overall response to fraud risks identified in an audit?

Ans B - Use less predictable audit procedures.

If specific information comes to an auditor’s attention that implies the existence of possible illegal acts
that could have a material, but indirect effect on the financial statements, the auditor should next

Ans A - Apply audit procedures specifically directed to ascertaining whether an illegal act has occurred.

Which of the following is not a factor that relates to opportunities to commit fraudulent financial
reporting?

Ans C - Management’s practice of making overly aggressive forecasts

The following are examples of circumstances that may indicate the possibility that the financial
statements may contain a material misstatements resulting from fraud, except

Ans B - Large numbers of debit entries and other adjustments made to accounts receivable records.

An auditor who discovers that a client’s employees paid small bribes to municipal officials most likely
would withdraw from the engagement if

Ans D - Management fails to take the appropriate remedial action.

Which of the following is correct concerning requirements about auditor communications about fraud?

Ans A - Fraud that involves senior management should be reported directly to the audit committee
regardless of the amount involved.

The Financial Statements Audit

General Approach - Assessment

The auditor’s opinion

Ans A - Enhances the credibility of the financial statements.

It refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the
audit.

Ans A - Scope of an audit

Which of the following is not one of the seven broad categories of financial statement assertions, as
classified in Glossary of Terms?

Ans A - Ownership

The auditor is required to maintain professional skepticism throughout the audit. Which of the following
statements concerning professional scepticism is false?

Ans A - A belief that management and those charged with governance are honest and have integrity
relieves the auditor of the need to maintain professional scepticism.

Which of the following is incorrect regarding the general principles of an audit?

Ans D - The   auditor   would   ordinarily   expect   to   find   evidence   to   support   management
representations and assume they are necessarily correct.

The purpose of an audit of FS is to

Ans C - Enhance the degree of confidence of intended users of the FS

An audit of FS is conducted to determine if the

Ans A - Overall financial statements are stated in accordance with an applicable financial reporting
framework

Management assertions are

Ans B - Implied or expressed representations about the accounts in the financial statements

Overview of the Audit Process - Assessment

Which of the following is the correct order of steps in the audit process?

A.      Perform test of controls

B.      Develop an overall strategy for the expected conduct and scope of the audit

C.      Obtain client’s written representation

D.      Prepare engagement letter

E.       Perform substantive tests

Ans B - D, B, A, E, C

The five major phases in conducting a risk- based audit process are:

a.       Audit planning and risk assessment activities

b.      Preliminary engagement activities

c.       Completing the audit and post- audit responsibilities

d.      Reporting and communication

e.      Responses to assessed risks

 The proper sequence in applying the above steps is:

Ans B - baedc

The five major phases in conducting a risk- based audit process are:

a.      Audit planning and risk assessment activities

b.      Preliminary engagement activities

c.      Completing the audit and post- audit responsibilities

d.      Reporting and communication

e.      Responses to assessed risks

 The proper sequence in applying the above steps is:

Ans B - baedc

Accepting an Engagement - Assessment

In making a decision to accept or continue with a client, the auditor should consider

its competence

its independence

its ability to serve the client properly

 the integrity of clients management

agreement of the terms of engagement with

the management

Ans A - Yes

Yes

Yes

Yes

Yes

An engagement letter would not normally include

Ans C - details of the procedures that will be performed

An engagement letter should be written before the start of an audit because

Choices:

a) it may limit the auditor's legal liability by specifying the auditor's responsibilities
b) it specifies the client's responsibility for preparing schedules and making the records available to
the auditor.
c) it specifies the basis for billing the audit for the upcoming year.

Ans D - All of the choices given

The engagement letter will do one, some, or all of the following:

1.       State whether the CPA will perform audit, review, or compilation services.

2)      State whether the CPA will perform tax or management advisory or other services.

3)      State any restriction to be imposed on the CPA’s work.

4)      Identify deadlines for completing the work.

5)      State the amount and type of work to be done by client’s personnel in generating auditor’s
working papers.

6)      State the CPA’s fees for the engagement.

Inform the client that the CPA does not have responsibility for detecting fraud.

The engagement letter does

Ans D - All seven of the above stated items.

According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed
terms would need to be recorded in a(n)

Ans B - engagement letter

Dora, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonpublic
entity. Before the completion of the audit, Tech requested Dora to change the engagement to a review
of financial statements. Before Dora agrees to change the engagement, Dora is required to consider the

(1) Legal or contractual implications of the request

(2) Reason given for Tech’s Request

Ans B - (1)Yes;     (2)Yes

When a change in the type of engagement from higher to lower level of assurance is reasonably
justified, the report based on the revised engagement (choose the correct one)

Ans A - Should not contain a separate paragraph that refers to the original engagement.

What is the most likely course of action that will be taken by an auditor in assessing management
integrity?

Ans C - Research the background and histories of officers

An engagement letter should ordinarily include information on the objectives of the engagement and

(1)CPA’s Responsibilities             

(2)Client's Responsibilities

(3)Limitations of Engagement

Ans A - (1)Yes;     (2)Yes;     (3)Yes 

The following are the reasons why the auditor will send  a new engagement letter each period, except

Ans B - A recent change in the audit team

The form and content of audit engagement letters may vary for each client, but they would generally
include reference to the following, except

Ans B - Auditor’s responsibility for the financial statements

Engagement letter that documents and confirms the auditor’s acceptance of the engagement would
normally be sent to the client.

Ans D - before the commencement of the engagement

Before accepting an audit engagement, you as the successor auditor would least likely make specific
inquiries of the previous auditor regarding

Ans B - The degree of cooperation the previous auditor received from the client’s lawyer.

When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the
predecessor auditor. This is necessary procedure because the predecessor may be able to provide the
successor with information that will assist the successor in determining whether the engagement should
be accepted.

Before accepting an audit engagement, a successor auditor makes specific inquiries of the predecessor
auditor regarding disagreements the predecessor had with the client concerning auditing procedures
and accounting principles.

Ans D - Both statements are true

A written understanding between the auditor and the client concerning the auditor’s responsibilities for
the discovery of illegal acts is usually set forth in a(an).

Ans D - engagement letter

An engagement letter should be written before the start of an audit because

Choices:

a) it may limit the auditor’s legal liability by specifying auditor’s responsibilities.

b) it specifies the client’s responsibility for preparing schedules and making the records available to
the auditor.
 c) it specifies the basis for billing the audit for the upcoming year.

Ans D - All of the above

Which of the following would ordinarily be considered a reasonable basis for requesting a change in the
engagement?

Choices:

a) a change in circumstances.
b) a misunderstanding as to the nature of the audit.

Ans D - Both a and b

Which of the following factors do not influence the decision of the auditor to send a separate
engagement letter to the parent entity and its component (subsidiary, branch, or division) assuming the
same auditor handles both entities?

Ans C - Ethical requirements

Which of the following actions may be appropriate if the auditor is unable to agree to a change of the
engagement and is not permitted to continue the original engagement?

(I) Auditor should withdraw from the engagement

(II) Consider whether there is any obligation to report to the board of directors or shareholders the
circumstances necessitating withdrawal

Ans B - I, II

The use of an engagement letter is the best method of documenting 

(I) The required communication of significant deficiencies in internal control structure

(II) Significantly lower materiality levels than those used in the prior audit

(III) The description of any letters or reports that the auditor expects to issue

(IV) Arrangements concerning the involvement of internal auditors and other client staff

Ans D - III and IV

Before performing any audit procedures. The auditor and the client should agree on the

(1) Type of opinion to be expressed

(2) Specific procedures to be performed

 
(3) Terms of the engagement

Ans C - (1)No;     (2)No;     (3)Yes

Which of the following is (are) valid reasons why an auditor sends to his client an engagement letter?

(1) To avoid misunderstanding with respect to engagement

(2) To confirm the auditor’s acceptance of the appointment

(3) To document the objective and scope of the audit

(4) To ensure CPA’s compliance to PSA

Ans B - (1)Yes;     (2)Yes;     (3)Yes;     (4)No;   

Which of the following will an auditor most likely discuss with the former auditors of a potential client
prior to acceptance?

Choices:

a) integrity management
b) reasons for changing audit terms
c) disagreements with management regarding accounting principles

Ans D - All of the above must be discussed

In determining audit fees,  an auditor may take account each of the following except

Ans D - Size and amount of capital of client

The use by management of an acceptable  financial reporting framework in the preparation of the
financial statements and the agreement of management and, where appropriate, those charged with
governance to the premise on which an audit is considered

Ans B - Preconditions for an audit

The form and content of the audit engagement letters may vary for each client, but they would generally
include reference to:

Ans A - management’s responsibility for the financial statements

The understanding between the client and the auditor as to the degree of responsibilities to be assumed
by each is normally set forth in a (an)

Ans B - engagement letter

Which of the following will an auditor least likely discuss with the former auditors of a potential client
prior to acceptance?

Ans B - Fees charged for services

It is in the interest of both client and auditor that the auditor sends an audit engagement letter,
preferably before

Ans B - The commencement of the engagement

In which of the following situations would the auditor be unlikely to send a new engagement letter to a
continuing client?

Ans D - a recent change in the partner and/or staff in the audit engagement

An engagement letter should ordinarily include information on the objectives of the engagement and
(CPA responsibilities, Client responsibilities, Limitation of engagement)

Ans C - Yes, Yes, Yes

Which of the following is not one of the principal contents of an engagement letter?

Ans A - objectives of the financial statements

On an audit engagement performed by a CPA firm with one office, at the minimum, knowledge of the
relevant professional accounting and auditing standards should be held by

Ans A - The auditor with final responsibility for the audit

Arrangements concerning which of the following are least likely to be included in engagement letter?

Ans C - CPA investment in client securities

In a continuing engagement, the continuing auditor would most likely send a new engagement letter
when

Ans B - there is a recent change in the client’s board of directors

When an auditor believes that an understanding with the client has t been established, he or she should
ordinarily

Ans B - Decline to accept or perform the audit

1st statement – Where the terms of the engagement are changed, the auditor and the client should
agree on the new terms.

2nd statement – The auditor should not agree to a change of engagement when there is no reasonable
justification for doing so.

3rd statement – If the auditor is unable to agree to a change of the engagement and is not permitted to
continue the original engagement, the auditor should withdraw and consider whether there is any
obligation, either contractual or otherwise, to report to other parties, such as the board of directors or
shareholders, the circumstances necessitating the withdrawal.

Ans D - All statements are correct.

Prior to the acceptance of an audit engagement with a client who has terminated the services of the
predecessor auditor, the CPA should

Ans D - Advise the client of the intention to contact the predecessor auditor and request permission for
the contact.

When a professional accountant is the auditor of a parent entity and also the auditor of its subsidiary,
branch or division (component), which of the following factors need not be considered in deciding
whether to send the separate engagement letter to the component

Ans D - Number of reports to be prepared during the peak audit season.

Preplanning the audit involves several key activities. Which of the following would not be included in
preplanning an audit?

Ans B - Determining the likelihood of issuing an unqualified audit opinion on the client’s financial
statements

Communication with a predecessor auditor is initiated by:

Ans B - The successor auditor

Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a
new engagement letter to the client?

Ans A - A recent change in partner and/or staff involved in the audit engagement.

An engagement letter is best described as:

Ans C - A letter from the auditors to company management that specifies the responsibilities of both the
company and the auditors in completing the audit and the timing for its completion.

Which of the following is not included in the engagement letter?

Ans B - Representation that the financial statements were prepared in accordance with generally
accepted accounting principles

The auditor shall agree the terms of the audit engagement with management or those charged with
governance, as appropriate. Which of the following normally signs the engagement letter for an audit of
a public company

Ans D - Audit committee

Which of the following would be least likely to be included in the auditor’s engagement letter?

Ans D - Type of opinion to be issued

Prior to the acceptance of an audit engagement with a client who has terminated the services of the
predecessor auditor, the auditor should

Ans D - Advise the client of the intention to contact the predecessor auditor and request permission for
the contact.

The primary reason an engagement letter is obtained by audit firms prior to starting the work is that

Ans A - it clarifies the responsibilities of management and those of the auditor.

Retention of Existing Clients - Assessment

Which of the following would not be a valid justification for changing the nature of an engagement?

Ans C - there was a management imposed scope limitation that requires modification of audit opinion.

Retainer’s fee basis is when

Ans C - The client is billed a fixed fee periodically for the services rendered during a designated period of
time.

The auditor would most likely withdraw from the engagement if

Ans B - the auditor is unable to agree to a change of the engagement and  is not permitted to continue
the original engagement

Assuming the recurring audit, in which of the following situations would the auditor be unlikely to send
a new engagement letter to the client?

Ans A - A recent change partner and/ or staff involved in the audit engagement.

In a continuing engagement, the continuing auditor would most likely send a new engagement letter
when

Ans B - there is a recent change in the client’s board of directors.

Engagement Letter - Assessment

Which of the following is not one of the principal contents of an engagement letter?

Ans A - objectives of the financial statements

Engagement letter that documents and confirms the auditor’s acceptance of the engagement would
normally be sent to the client.

Ans D - before the commencement of the engagement

The following matters are generally included in an auditor’s engagement letter, except

Ans D - The factors to be considered in setting preliminary judgments about materiality

According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed
terms would need to be recorded in a(n)

Ans B - engagement letter

Which of the following is not included in an engagement letter?

Ans A - Restriction on cash balances, lines of credit by similar arrangements

An engagement letter should ordinarily include information on the objectives of the engagement and ….

  CPA’s    responsibilities Management’s Limitations of

responsibilities engagement

Ans A -

Yes Yes Yes

Which of the following would be least likely to be included in the auditor’s engagement letter?

Ans D - Type of opinion to be issued

Which of the following is (are) valid reasons why an auditor sends to his client an engagement letter?

To avoid misunderstanding with respect to engagement

To confirm the auditor’s acceptance of the appointment

To document the objective and scope of the audit

To ensure CPA’s compliance to PSA

Ans B - Yes

Yes

Yes

No

The following are the reasons why the auditor will send  a new engagement letter each period, except

Ans B - A recent change in the audit team

Understanding the Entity and its Environment - Assessment

A procedure that would least likely be used by an auditor in performing tests of control is

Ans D - Recalculation

Which of the following is not useful for obtaining an understanding of internal controls?

Ans C - Read industry trade magazines

Before relying on the system of internal control, the auditor obtains a reasonable degree of assurance
that the internal control procedures are in use and operating as planned. The auditor obtains this
assurance by performing

Ans C - Compliance test/ Tests of controls

When obtaining understanding of the entity’s control, the auditor should obtain knowledge about the
internal control’s

1)      Design

2)      Implementation

3)       Operating effectiveness

Ans B - 1)   yes       2)   yes       3)   no

Which of the following statements is correct with respect to obtaining an understanding with a client?

Ans C - Auditor must document their understanding of the engagement.

Reasons to evaluate internal control would not include

Ans C - Basis for type of opinion to be rendered

In the audit of a private company, the auditor will test controls when control risk is initially assessed at:

Low moderate high

Ans C -

yes yes no

In considering internal control, what is the purpose of a transaction walk through?

Ans B - To confirm the auditor’s understanding of the internal control structure

When the auditor attempts to understand the operation of the accounting system by tracing a few
transactions through the accounting system, the auditor is said to be:

Ans C - Performing a walk- through

Adequate audit planning helps ensure that appropriate attention is devoted:

1)   To important areas of the audit

2)   So that potential problems are promptly identified

3)   So that the work is completed expeditiously

Ans B - 1)   Yes       2)   Yes       3)   Yes

Which of the following is not a medium that can normally be used by an auditor to record information
concerning a client’s internal control policies and procedures

Ans B - Procedures manual

Which of the following would an auditor least likely perform when obtaining understanding of the
entity’s internal control?

Ans A - Reperformance of internal control

Which of the following is not a reason that the auditor must gain an understanding of the client’s
internal control system?

Choices:

a) To better understand the client, its risk, and how it manages those risks.
b) To assess control risk and identify the types of financial statement misstatements that are most
likely to occur affecting relevant financial statement assertions.
c) To plan direct tests of account balances to determine if misstatements have occurred.

Ans D - All are reasons why auditors must gain an understanding of the client’s internal control system.

An auditor obtains knowledge about a new client's business and its industry to

Ans D - Understand the events and transactions that may have an effect on the client's financial
statements.

When an auditor increase the planned assessed level control risk because certain control procedures
were determined to be ineffective the auditor would most likely increase the

Ans A - Extent of test of details (substantive tests)

An auditor is required to establish an understanding with a client regarding the services to be performed
for each engagement. This understanding generally includes
Ans B - The auditor’s responsibility for ensuring that the audit committee is aware of any significant
deficiencies in internal control that come to the auditor’s attention

The auditor’s understanding of the entity and the environment consists of the following aspects

I. Industry, regulatory, and other external factors, including the applicable financial reporting framework

II. Nature of the entity, including the entity’s selection and application of accounting policies

III. Objectives and strategies and the related business risks that may result in a material misstatement of
the financial statements.

IV. Measurement and review of the entity’s financial performance.

     Internal control

Ans A - All of the above

For the auditor to assess control risk account balances at less than the maximum

Ans C - The external auditor must test and valuate some of the controls

To obtain evidential matter abut control risk, an auditor selects tests from a variety of techniques
including

Ans A - Inquiry

PSAs requires the auditor to obtain understanding of the entity’s internal control structure

Ans B - For every audit

A primary objective of procedures performed to obtain an understanding of internal control is to

provide an auditor with

Ans A - Knowledge necessary to assess the risks of material misstatements

Which of the following statements about auditor documentation of the client’s internal control is
correct?

Ans D - No one particular form of documentation is necessary, and the extent of documentation may
vary.

Understanding the Internal Control (CONINC) - Assessment

To obtain an understanding of the relevant policies and procedures of internal control, the auditor
performs all of the following except:

Ans B - Design substantive tests or C

In an auditor’s consideration of internal control, the completion of a questionnaire is most closely

associated with which of the following?

Ans B - Understanding the system or B

The primary objective of procedures performed to obtain an understanding of internal control is to

provide an auditor with

Ans C - Knowledge necessary to plan the audit.

Which of the following statements about internal control is correct?

Ans D - The cost-benefit relationship should be considered in designing internal control.

Of the following, the best statement of the CPA’s primary objective in considering internal control is
that the review is intended to provide

Ans A - A basis for reliance on the system and determining the scope of other auditing procedures.
An auditor intends to perform tests of control on a client’s cash disbursements procedures.  If the
control procedures leave no audit trail of documentary evidence, the auditor most likely will test the
procedures by

Ans B - Inquiry and observation.

The auditor's review of the client's internal control is documented in order to substantiate

Ans C - Compliance with PSA.

Which of the following is correct about internal control?

Ans B- One of the inherent limitations of accounting and internal control systems is the possibility that
the procedures may become inadequate due to changes in conditions, and compliance with procedures
may deteriorate.

In obtaining an understanding of an entity’s internal control structure, an auditor is required to obtain

knowledge about the

Operating effectiveness of    Design of policies

        Policies and procedures       and procedures

Ans B - No                                           Yes

When obtaining an understanding of the accounting and internal control system the auditor may trace a
few transactions through the accounting system.  This technique is:

Ans C - Walk-through test

Because of the risk of material misstatement, an audit of financial statements in accordance with PSAs
should be planned and performed with an attitude of

Ans D - Professional skepticism.

Which of the following is an incorrect statement concerning the relationship of the internal auditor and
the scope of the external audit of an entity’s financial statements?

Ans B - The internal auditors may determine the extent to which audit procedures should be employed
by the external auditor.

Corporate directors, management, external auditors, and internal auditors all play important roles in
creating a proper control environment.  Top management is primarily responsible for

Ans A - Establishing a proper environment and specifying overall internal control.

After obtaining an understanding of a client’s controls, an auditor may decide to omit tests of the
controls. Which of the following in not appropriate reason to omit tests of controls?

Ans B - The controls appear adequate.

Developing an Overall Audit Strategy - Assessment

When the auditor identifies a misstatement in the financial statements, the auditor should consider
whether such a misstatement may be indicative of fraud and if there is such an indication, the auditor
should

Ans A - Consider the implications of the misstatement in relation to other aspects of the audit.

When planning the audit, the auditor should make inquiries of management.  Such inquiries should
address the following, except

Ans C - Management’s consideration of how an element of unpredictability will be incorporated into the
nature, timing, and extent of the audit procedures to be performed.

The following are the matters to be considered by the auditor in establishing the overall audit strategy,
except
Ans C - Computation of audit fees

In developing the overall audit strategy for a new client factor not to be considered is:

Ans C - The specific procedures to be performed to gather audit evidence.

After gaining an understanding of internal control and assessing the risks of material misstatement, an
auditor decided to perform tests of controls. The auditor most likely decided that

Ans B - It is not possible or practicable to reduce the risks of material misstatement at the assertion level
to an acceptably low level with audit evidence obtained only from substantive test procedures.

Which of the following matters should be considered by the auditor in developing the overall audit
strategy?

Choices:

a) Important characteristics of the entity, its business, its financial performance and its reporting
requirements including changes since the date of the prior audit.
b) Conditions requiring special attention, such as the existence of related parties.
c) The setting of materiality levels for audit purposes.

Ans D - All of the above.

Which of the following is not considered by the auditor when preparing an overall audit plan?

Ans D - The content of the management representation letter.

Risk Assessment Procedures – Assessment

When obtaining an understanding of the entity and its environment, including its internal control, the
auditor may identify events or conditions that indicate an incentive or pressure to commit fraud or
provide an opportunity to commit fraud.  Such events or conditions are referred to as

Ans B - Fraud risk factors.

The type of transactions that ordinarily have high inherent risk because they involve management
judgment or assumptions are referred to as

Ans A - estimation transactions

Why should the auditor plan more work on individual accounts as lower acceptable levels of both audit
risk and materiality are established?

Ans A - To find smaller errors

Which statement is incorrect regarding the discussion among the engagement team about the
susceptibility of the entity’s financial statements to material misstatements?

Ans D - All the team members should have a comprehensive knowledge of all aspects of the audit.

When the auditor determines that detection risk regarding a financial statement assertion for a material
account balance or class of transactions cannot be reduced to an acceptable level, the auditor should
express

Ans B - Qualified or disclaimer of opinion

Auditor would normally interview all but which of the following individuals as part of their assessment of
fraud risk?

Choices:

a) Senior management
b) Audit committee
c) Various employees whose duties do not include normal financial reporting responsibilities

Ans D - All of the above

Which of the following audit risk components may be assessed in non-quantitative terms?
1)     Inherent Risk

2)     Control Risk

3)     Detection Risk

Ans D - 1)   Yes       2)   Yes       3)   Yes

Which of the following conditions and events may most likely indicate the existence of risks of material,
misstatements?

Ans D - Constraints on the availability of capital and credit

Per PSA 240, there is a rebuttable presumption that significant risk is presumed in the recognition of
which of the following accounts?

Ans B - Sales

If the results of the auditor’s expert’s work do not provide sufficient appropriate audit evidence or are
not consistent with other audit evidence, the auditor should

Ans B - Resolve the matter.

The auditor should perform the following risk assessment procedures to obtain an understanding of the
entity and its environment, including its internal control, except:

Ans B - Inquiries of the entity’s external legal counsel or of valuation experts that the entity has used.

In performing tests of the operating effectiveness of an entity’s controls, an auditor selects from a
variety of techniques, including

Ans A - Reperformance and observation.

The auditor is most likely to presume that a high risk of irregularities exists if

Ans C - inadequate segregation of duties places an employee in a position to perpetrate and conceal
thefts.

Which of the following characteristic most likely would heighten an auditor’s concern about the risk of
intentional manipulation of financial statements?

Ans C - Management places substantial emphasis on meeting earning projections.

The main purpose of risk assessment procedures is to

Ans A - Obtain an understanding of the entity and its environment, including its internal control, to
assess the risks of material misstatement at the financial statement and assertion levels.

Assume that a company has a control deficiency regarding the processing of cash receipts.
Reconciliation of cash accounts by a competent individual otherwise independent of the cash function
might make the likelihood of a significant misstatement due to the control deficiency remote. In this
situation, reconciliation may be referred to as what type of control?

Ans A - Compensating

An auditor may decide to assess control risk at the maximum level for certain assertions because the
auditor believes

Ans A - Controls are unlikely to pertain to the assertions.

Which statement is incorrect regarding the nature of further audit procedures?

Ans C - The higher the auditor’s assessment of risk, the less reliable and relevant is the audit evidence
sought by the auditor from substantive procedures.

Which of the following is an incorrect statement?

Ans A - Detection risk cannot be changed at the auditor’s discretion

A potential business risk created by industry development may most likely include

Ans C - The entity does not have the personnel or expertise to deal with the changes in the industry
Which of the following statements is true with regard to the relationship among audit risk, audit
evidence, and materiality?

Ans B - Under conditions of high inherent and control risk, the auditor should place more emphasis on
obtaining external evidence and should reduce reliance on internal evidence.

In which of the following would the auditor be most likely to find information about the compensation
of corporate officers?

Ans C - Corporate minutes

Auditors appear not to exhibit due care if there was

Ans A - High audit risk

Which of the following procedures concerning accounts receivable would an auditor most likely perform
to obtain evidence in support of an assessed level of control risk below the maximum?

Ans A - Observing an entity’s employee prepare the schedule of past due accounts receivable

Inherent risk is ________related to detection risk and ________ related to the amount of audit
evidence.

Ans D - Inversely, directly

Which statement is incorrect regarding tests of controls?

Ans D - Testing the operating effectiveness of controls is the same as obtaining audit evidence that
controls have been implemented.

Your client, a merchandising concern, has annual sales of P30,000,000 and a 40% gross profit rate.  Tests
reveal that 2% of the peso amount of purchases do not get into inventory because of breakage and
inventory pilferage by employees.  The company estimates that these losses could be reduced to 0.5%
of purchases by designing and implementing certain controls costing approximately P350,000.  Should
the controls be designed and implemented?

Ans C - No, because the cost of designing and implementing the added controls exceeds the projected
savings.

The risk that the audit will fail to uncover a material misstatement is eliminated

Ans D - under no circumstances

Inquiries directed towards internal audit personnel may most likely

Ans A - Relate to their activities concerning the design and effectiveness of the entity’s internal control
and whether management has satisfactorily responded to any findings from those activities

In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud
is

Ans C - greater for management fraud because of management ‘s ability to override existing internal
controls.

A client maintains perpetual inventory records in both quantities and peso. If the assessed level of
control risk is high, an auditor would probably

Ans D - Request the client to schedule the physical inventory count at the end of the year

Detection risk is

Ans C - The risk that an auditor’s substantive procedures will not detect a misstatement that exists in an
account balance or class or transactions that could be material, individually or when aggregated with
misstatements  in other balances or classes.

Which of the following is most likely to be presumed to represent a fraud risk on an audit?

Ans B - Improper revenue recognition

Inherent risk and control risk collectively are known as

Ans C - The risk of material misstatement

Which of the following controls is not usually performed in the accounts payable department?

Ans D - Detection risk exists independently of the audit of the financial statements.

Which of the following is of least concern to an auditor in assessing the risks of material misstatement?

Ans B - Checks are signed by one person.

Inherent risk and control risk differ from detection risk in that inherent risk and control risk

Ans C - Exist independently of the financial statement audit

PSA 330 requires the auditor to

Choices:

a) Determine overall responses to address risks of material misstatement at the financial

statement level.
b) Design and perform further audit procedures, including tests of the operating effectiveness of
controls, when relevant or required, and substantive procedures, whose nature, timing, and
extent are responsive to the assessed risks of material misstatement at the assertion level.
c) Evaluate whether the risk assessment remain appropriate and to conclude whether sufficient
appropriate audit evidence has been obtained.

Ans D - All of the above.

Which of the following statements identifies a potential weakness with comparing client data
with industry

a) Industry data may not be representative of the client’s business

b) Other companies in the industry could use different accounting principles than the client.
c) Data bases are comprised of date from thousands of companies of various sizes, which
may limit the effectiveness of the comparisons.

Ans D - All the above are weaknesses.

Which of the following types of risk is significantly affected by the nature, amount and timing of
substantive auditing procedures?

Ans C - Detection risk

The auditor’s understanding of the entity and its environment consists of an understanding of the
following aspects:

I.            Industry, regulatory, and other external factors, including the applicable financial reporting
framework.

II.            Nature of the entity, including the entity’s selection and application of accounting policies.

III.            Objectives and strategies and the related business risks that may result in a material
misstatement of the financial                                  statements.

IV.            Measurement and review of the entity’s financial performance.

                     V.            Internal control.

Ans A - All of the above

The audit risk model consists of:   AR = IR x CR x DR

The detection risk is the dependent variable.  What is the acceptable level of detection risk if the
assessed level of Inherent risk is High and the Control risk is Low?

Ans B - Medium
Which of the following control activities in an entity’s revenue/receipt cycle would provide reasonable
assurance that all billed sales are correctly posted to the accounts receivable ledger?

Ans C - Daily sales summaries are compared to daily postings to the accounts receivable ledger.

The existence of a related party transaction may be indicated when another entity

Ans B - absorbs expense of the corporation.

The assessment of the risks of material misstatement at the financial statement level is affected by the
auditor’s understanding of the control environment. Weaknesses in the control environment ordinarily
will lead the auditor to

Ans C - Modify the nature of audit procedures to obtain more persuasive audit evidence.

Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable
assurance that controls are in use and operating effectively. This assurance is most likely obtained in
part by

Ans D - Inspection of documents

According to PSA 330 (The Auditor’s Procedures in Response to Assessed Risks), an auditor who plans to
rely on controls that have not changed since they were last tested should test the operating
effectiveness of such controls at least once every

Ans B - Third audit

Which of the following combinations of engagement risk, audit risk, and materiality would lead the
auditor to most audit work?

1)     Engagement Risk

2)     Audit Risk

3)     Materiality

Ans B - 1)   Moderate       2)   Low       3)   Low

According to PSA 400 – Risk Assessments and Internal Control, audit risk means

Ans D - The risk that the auditor gives an inappropriate audit opinion when the financial statements are
materially misstated.

Inherent risk is defined as the susceptibility of an account balance or class of transactions to error that
could be material assuming that there were no related internal controls. Of the following conditions,
which one does not increase inherent  risk?

Ans B - Internal control over shipping, billing, and recording of sales revenue is weak.

As the acceptable level of detection risk increases, an auditor may change the

Ans B - Nature of substantive tests from a more effective to a less effective procedure

The relationship between acceptable level of detection risk and the combined level of inherent and
control risk is

Ans B - Inverse

Which of the following is a function of the risks of material misstatement and detection risk?

Ans D - Audit risk

Audit risk components consist of inherent, control and detection risk. Which of them is/are dependent
variables?

Ans C - Detection risk

The two types of intentional misstatements that are relevant to the auditor’s consideration of fraud
include, misstatements resulting from fraudulent financial reporting and misstatements resulting from
misappropriation of assets. Fraudulent financial reporting least likely involve.
Ans D - Embezzling receipts, stealing physical assets or intellectual property, causing an entity to pay for
goods and services not received, or using an entity’s assets for personal use.

Which of the following is most likely to be an overall response to fraud risks identified in an audit?

Ans B - Use less predictable audit procedures.

Which statement is incorrect regarding the timing of further audit procedures?

Ans D - All audit procedures can be performed prior to period end.

Which of the following procedures would an auditor least likely perform while obtaining an
understanding of a client in a financial statement audit?

Ans C - Selecting a sample of vendors’ invoices for comparison to receiving reports

When inherent risk is high, there will need to be

A lower assessment of audit risk.                                    More evidence accumulated  by the auditor.

Ans D - No           Yes

Which of the following tests of controls most likely would help assure an auditor that goods shipped are
properly billed?

Ans B - Examine shipping documents for matching sales invoices.

A measure of how willing the auditor is to accept that the financial statements may be materially
misstated after the audit is completed and an unmodified opinion has been issued is the

Ans B - Acceptable audit risk.

Auditor would perform the following steps in which order?

Ans B - Set materiality; determine audit risk; assess control risk; determine detection risk.

Which of the following controls most likely would provide reasonable assurance that all credit sales
transactions of an entity are recorded?

Ans C - The billing department supervisor matches prenumbered shipping documents with entries in the
sales journal.

Which of the following does an auditor least likely perform in assessing audit risk?

Ans A - Gather audit evidence in support of recorded transactions.

A potential business risk created by industry developments may most likely include

Ans C – C - The entity does not have the personnel or expertise to deal with the changes in the industry.

Accounting for unused prenumbered purchase orders and receiving reports.

Ans C - Accounting for unused prenumbered purchase orders and receiving reports.

If the auditor sets the preliminary judgment about materiality at a relatively low peso amount,

Ans A - more evidence will be required than for a high amount.

Which statement is incorrect regarding the nature of tests of controls?

Ans C - The absence of misstatements detected by a substantive procedure provides audit evidence that
controls related to the assertion being tested are effective.

Which statement is incorrect regarding the extent of further audit procedures?

Ans C - The auditor ordinarily decreases the extent of audit procedures as the risk of material
misstatement increases.

Management integrity affects all of the following risks, except:

Choices:
 a) Enterprise risk
b) Financial reporting risk
c) Engagement risk

Ans D - Management integrity affects all of the following risks, except:

An auditor should obtain sufficient knowledge of an entity’s information system, including the related
business processes relevant to financial reporting, to understand the

Ans B - Process used to prepare significant accounting estimates.

Which statement is incorrect regarding substantive procedures?

Ans B - The auditor always performs substantive procedures for each class of transactions, account
balance, and disclosure.

PSA 315 requires

Choices:

a) The auditor to obtain an understanding of the entity and its environment, including its internal
control.
b) Discussion among the engagement team about the susceptibility of the entity’s financial
statements to material misstatement.
c) The auditor to identify and assess the risks of material misstatement at the financial statement
and assertion levels.

Ans D – All of the above

Which statement is correct regarding business risks?

Ans D - A business risk may have an immediate consequence for the risk of misstatement for classes of
transactions, account balances, and disclosures at the assertion level or the financial statements as a
whole.

Which of the following is the best definition of detection risk?

Ans B - The auditor will fail to detect material misstatement that occur.

Which of the following is correct statement?

Ans D - The auditor should obtain an understanding of the accounting and internal control systems
sufficient to plan the audit and develop an effective audit approach.

The auditor should design and perform further audit procedures whose nature, timing, and extent are
responsive to the assessed risks of material misstatement at the assertion level.  Which of the following
is the most important consideration in responding to the assessed risks?

Ans A - The nature of the audit procedures.

As the acceptable level of detection risk decrease an auditor may

Ans B - Postpone the planned timing on substantive tests from interim dates to the year-end.

Which of the following is not a distinguishing feature of risk-based auditing?

Ans C - Collecting and evaluating evidence.

Analytical Procedures - Assessment

Analytical procedures used planning an audit should focus on

Ans C - Enhancing the auditor’s understanding of the client’s business and identifying areas of potential
risk.

Analytical procedures used in planning an audit should focus on

Ans C - Enhancing the auditor’s understanding of the client’s business and identifying areas of potential
risk.

Auditors try to identify predictable relations when using analytical procedures. Relationships involving
transactions from which of the following accounts most likely would yield the highest level of evidence?

Ans C - Payroll expense

Which of the following most likely would indicate the existence of related parties?

Ans D - Borrowing money at an interest rate significantly below the market rate.

Analytical procedures used in the overall review stage of the audit generally include

Ans B - Considering unusual or unexpected account balances that were not previously identified.

Which of the following represents a procedure that the auditor may use because plausible
relationships among financial statement balances are expected to exist?

Ans A - Comparing last year’s interest expense with this year’s interest expense

Analytical procedures performed in the overall review stage of an audit suggest that several accounts
have unexpected relationships.  The results of these procedures most likely indicate that

Ans C - Additional substantive tests of details are required.

Which of the following results from analytical procedure might indicate obsolete inventory?

Ans A - A decline in inventory turnover

Analytical procedures are used in an audit because it is assumed of financial statements that

Ans D - Plausible relationships among data may reasonably be expected to exist and continue in the
absence of known conditions to the contrary.

As a form of analytical procedure, trend analysis

Ans A - Is based on the assumption that performance will continue in line with previous performance or
industry trends unless something unusual is happening I the company.

Which of the following statements is correct with respect to the auditor’s use of analytical procedures?

Ans D - Analytical procedures are required to be used during the planning and completion phase of the
audit.

The objective of performing analytical procedures in planning an audit is to identify the existence of

Ans A - Unusual transactions and events

Which of the following is not a reason for utilizing analytical procedures

Ans C - To determine the magnitude of error in the FS

If, when performing analytical procedures, an auditor observes that operating income has declined
significantly between the preceding year and the current year, the auditor should next

Ans B - consider the possibility that the financial statements may be materially misstated

Which of the following would not be considered an analytical procedure?

Ans B - Projecting an error rate by comparing the results of a statistical sample with the actual
population characteristics.

An auditor’s analytical procedures most likely would be facilitated if the entity

Ans B - Uses a standard cost system that produces variance reports

Evaluations of financial information made by a study of plausible relationships among both financial and
non-financial data. It also encompasses the investigation of identified fluctuations and relationships that
are inconsistent with other relevant information or that differ form expected values by a significant
amount.
Ans C - Analytical procedures

Which of the following auditing procedures most likely would assist an auditor in identifying related
party transactions?

Ans C - Reviewing confirmations of loans receivable and payable for indications of guarantees.

Analytical procedures are performed in the following order:

Ans D - Develop an expectation; calculate predictions and compare them to them recorded amount;
define a significant difference; investigate significant differences.

Analytical procedures enable the auditor to predict the balance or quantity of an item under audit.
Information to develop this estimate can be obtained from all the following except

Ans D - Tracing transactions through the system to determine whether procedures are being applied as
prescribed

Analytical procedures performed in the planning stage of an audit suggest that several accounts have
unexpected relationships. The results of these procedures most likely would indicate that:

Ans B - Additional test of details are required.

Which of the following represents a procedure that the auditor may use because plausible relationships
among financial statement balances are expected to exist?

Ans D - Analytical review

Which of the following nonfinancial information would an auditor most likely consider in performing
analytical procedures during the planning phase of an audit?

Ans C - Square footage of selling space

In performing an audit , which one of the following procedures would be considered an analytical
procedure?

Ans A - Comparing last year’s interest expense with this year’s interest expense

When must an auditor perform analytical review procedures in a financial statement audit?

Ans C - Planning the nature, timing and extent of procedures

For all audits of financial statements made in accordance with PSAs, the use of analytical procedures is
important

1)     In assessment of risk of material misstatement

2)     as substantive audit procedure

3)     as an overall review at the completion stage

Ans A - 1)   Yes       2)   No       3)   Yes

The auditor significant fluctuations in key elements of the company’s financial statements. If
management is unable to provide an acceptable explanation, the auditor should

Ans B - Perform additional audit procedures to investigate the  matter further

Documenting the Audit Plan – Assessment

Auditing standards require a successor auditor to communicate with the predecessor auditor. The Code
of Ethics requires confidentiality; therefore, the client’s permission must be obtained before the
communication can be made by

Ans A - the successor auditor.

As part of audit planning, CPAs should design audit programs for each individual audit and should
include audit steps and procedures to

Ans C - Provide assurances that the objectives of the audit are met
Which of the following is not true regarding planning in an electronic environment?

Ans C - The procedures used are not changed

Prior to beginning fieldwork on a new audit engagement in which a CPA does not possess industry
expertise, the CPA should

Ans D - obtain knowledge of matters that relate to the nature of the entity’s business and industry.

Which of the following is not a component of audit planning?

Ans A - Observing the client’s annual physical inventory taking and making test counts of selected items

Audit program is basically s listing of all the things the auditor will do to gather sufficient, competent
evidence. Which item would not be contained in an audit program?

Ans C - Documentation of system being reviewed

With respect to the auditor’s planning of a year-end examination which of the following statements is
always true?

Ans D - It is an acceptable practice to carry out substantial parts of the examination at interim dates.

How can the audit program best be described at the beginning of the audit process?

Ans A - Temporary

An audit program is

Ans A - the detailed plan of audit procedures to be performed in the course of the audit.

The elements of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the

Ans C - timing of inventory observation procedures to be performed.

B&C, auditors, have been accepted as the auditors of City Corporation. What are B&C’s responsibilities
with regard to contacting City Corporation’s predecessor auditors?

Ans C - B&C should attempt communications with the predecessor auditors and ask if they had any
accounting policy disagreements with City Corporation.

An audit program provides proof that

Ans B - the work was adequately planned.

In deciding whether to use the work of internal auditors, external auditors must evaluate the internal
auditors’

Ans A - objectivity and competence

The audit plan includes:

Choices:

a) A description of the nature, timing and extent of planned risk assessment procedures sufficient
to assess the risk of material misstatement.
b) A description of the nature, timing and extent of planned further audit procedures at the
assertion level for each material class of transactions, account balances and disclosures.
c) Other planned audit procedures that are required to be carried out so that the engagement
complies with our audit approach.

Ans D – All of the above

An audit plan is a

Ans B - document that provides an overview of the company and a general plan for the audit work to be
accomplished, timing of the work, and other matters of concern to the audit.

As a part of audit planning, CPAs should design audit programs for each individual audit and should
include audit steps and procedures to
Ans C - provide assurances that the objectives of the audit are met.

An initial (first-time) audit requires more audit time to complete than a recurring audit. One of the
reason for this is that

Ans C - the client’s business, industry and internal control are unfamiliar to the auditor and need to be
carefully studied.

Which statement best describe the emphasis of the systems and substantive approaches in the audit
plan?

Ans A - The system approach focuses on testing controls to make sure they are effective, while the
substantive approach is the detailed testing of specific accounts for accuracy.

After an auditor has been engaged to perform the first audit for a nonpublic entity, the client requested
to change the engagement to a review. In which of the following situations would there be a reasonable
basis to comply with the client’s request?

Ans A - The client’s bank required an audit before committing to a loan, but the client subsequently
acquired alternative financing.

Nature of Internal Control - Assessment

Which of the following statements about internal control is correct?

Ans D - The cost-benefit relationship should be considered in designing internal control.

The primary responsibility for designing, implementing and maintaining internal control, and the tone of
internal control typically originates, rests with

Ans D - The management/TCWG

Internal control procedures are not designed to provide reasonable assurance that

Ans C - Irregularities will be eliminated.

Effective internal control

Ans D - Reduces the need for management to review exception reports on a day-to-day basis.

In an audit of financial statements, an auditor’s primary consideration regarding a control is whether it

Ans B - Affects management’s financial statement assertions.

Proper segregation of functional responsibilities calls for separation of the functions of

Ans B - Authorization, recording, and custody.

In general, a material weakness in internal control may be defined as a condition in which material
errors or irregularities may occur and not be detected within a timely period by

Ans C - Employees in the normal course of performing their assigned functions.

Corporate directors, management, external auditors, and internal auditors all play important roles in
creating a proper control environment. Top management is primarily responsible for

Ans A - Establishing a proper environment and specifying overall internal control.

Which of the following is correct about internal control?

Ans B - One of the inherent limitations of accounting and internal control systems is the possibility that
the procedures may become inadequate due to changes in conditions, and compliance with procedures
may deteriorate.

When considering the effectiveness of a system of internal accounting control, the auditor should
recognize that inherent limitations do exist. Which of the following is an example of an inherent
limitation in a system of internal accounting control?

Ans C - In the performance of most control procedures, there are possibilities of errors arising from
mistakes in judgment 
Which of the following least likely affects the nature, timing, and extent of the procedures performed by
the auditor to obtain an understanding of the accounting and internal control systems of an audit client?

Ans C - The level of acceptable detection risk

Nature of the entity refers to

Ans A - The entity’s operations, its ownership and governance, the types of investments that it is making
and plans to make, the way that the entity is structured and how it is financed

According to PSA 400, which of the following is correct regarding internal control system?

Ans C - In the audit of financial statements, the auditor is only concerned with those policies and
procedures within the accounting and internal control systems that are relevant to the financial
statements.

As generally conceived, the “audit committee” of a publicly held company should be made up of

Ans A - Members of the board of directors who are not officers or employees.

Which of the following most likely would not be considered an inherent limitation of the potential
effectiveness of an entity’s internal control?

Ans A - Incompatible duties.

The process designed and affected by those charged with governance, management, and other
personnel to provide reasonable assurance about the achievement of the entity’s objectives with regard
to reliability of financial reporting, effectiveness and efficiency of operations and compliance with
applicable laws and regulations.

Ans A - Internal control

When considering internal control, an  auditor must be aware of the concept of reasonable assurance,
which recognizes that

Ans C - Cost of internal control procedures should not exceed the benefits expected to be derived from
the control

When considering internal control, an auditor should be aware of the concept of reasonable assurance,
which recognizes that

Ans D - The cost of an entity’s internal control should not exceed the benefits expected to be derived.

Components of Internal Control - Assessment

When obtaining an understanding of an entity’s control environment, an auditor should concentrate on

the substance of management’s policies and procedures rather than their form because

Ans C - Management may establish appropriate policies and procedures but not act on them

A secondary purpose of the auditor's consideration of internal control is to provide

Ans C - A basis for constructive suggestions about improvements in internal control structure.

Which of the following activities would be an example of Physical Control?

Ans A - Access to computer facilities and records is limited to authorized personnel.

Which of the following does not relate to the firm’s quality control policies and procedures on
engagement performance?

Ans C - Control environment

Which of the following is a responsibility that should not be assigned to only one employee?

Ans A - Access to securities in the company’s safe deposit box.

Control environment component of internal control

Ans B - Includes the governance and management functions and the attitudes, awareness, and actions of
those charged with governance and management concerning the entity’s internal control and its
importance in the entity.

In evaluating the design of the entity’s internal control environment, the auditor considers
the following elements and how they have been incorporated into the entity’s processes. Such elements
would include all of the following except

Ans D - Information and communications systems

Which of the following best describe the interrelated components of internal control?

Ans B - Control environment, risk assessment, control activities, information and communication
systems, and monitoring.

Which of the following does not relate to the firm’s quality control policies and procedures on
engagement performance?

Ans A - Independence

An entity’s ongoing monitoring activities often include

Ans B - Reviewing the purchasing function.

The policies and procedures that help ensure that management directives are carried out are referred to
as the:

Ans B - Control activities

The overall attitude and awareness of an entity’s board of directors concerning the importance of
internal control usually is reflected in its

Ans B - Control environment.

Which of the following is not a component of an entity’s internal control?

Ans A -Control risk

Transaction authorization within an organization may be either specific or general.  An example of

specific transaction authorization is the

Ans A - Approval of a construction budget for a new warehouse

Proper segregation of functional responsibilities calls for separation of the functions of

Ans A - Authorization, execution, and recording.

Which of the following is not part of the control environment?

Ans C - Information and communication systems.

Which of the following is not an element of a system of quality control?

Ans D - Measurement and review of performance

Which of the following best describes the interrelated components of internal control?

Ans B - Control environment, risk assessment, control activities, information and communication
systems, and monitoring

The process of evaluating the quality of internal control overtime is known as

Ans B - Monitoring

Consideration of Internal Controls - Assessment

After considering a client’s internal control, an auditor has concluded that the system is well designed
and is functioning as anticipated. Under these circumstances, the auditor would most likely
Ans B - Not increase the extent of planned substantive tests

After considering internal control, an auditor might decide to

Ans B - Increase the extent of substantive tests in areas where internal control is weak

After obtaining an understanding of a client’s controls, an auditor may decide to omit tests of the contro
ls. Which of the following in not appropriate reason to omit tests of controls?

Ans B - The controls appear adequate.

In an auditor’s consideration of internal control, the completion of a questionnaire is most closely

associated with which of the following?

Ans B - Understanding the system

To obtain an understanding of the relevant policies and procedures of internal control, the auditor
performs all of the following except:

Ans B - Design substantive tests

Before relying on the system of internal control, the auditor obtains a reasonable degree of assurance
that the internal control procedures are in use and operating as planned. The auditor obtains this
assurance by performing planned

Ans B - Tests of controls

Effectiveness of Substantive Tests - Assessment

Which of the following statements is incorrect regarding relevance of audit evidence?

Ans C - Obtaining audit evidence relating to a particular assertion is a substitute for obtaining audit
evidence regarding another assertion.

Which statement is correct regarding the sufficiency and appropriateness of audit evidence?

Ans C - The quantity of audit evidence needed is affected by the risk of misstatement (the greater the
risk, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the
higher the quality, the less may be required).

Relationship Between Substantive Test and Test of Controls - Assessment

In which of the following circumstances would the use of the negative form of accounts receivable
confirmation most likely be justified?

Ans D - A small number of accounts may be in dispute and the accounts receivable balance arises from
sales to many customers with small balances.

Which of the following statements is correct concerning the use of negative confirmation requests?

Ans A - Unreturned negative confirmation requests rarely provide significant explicit evidence.

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts
receivable when the auditor has concerns about the receivables

Ans C - Existence

Observation

Ans A - Consists of looking at a process or procedure being performed by others.

The auditor is examining copies of sales invoices only for the initials of the person responsible for
checking the extensions.  This is an example of a

Ans A - Test of controls

An auditor wishes to perform tests of controls on a client’s cash disbursements procedures.  If the
controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by
Ans B - Observation and inquiry.

The principal reason for an independent auditor to gather and evaluate audit evidence is to

Ans D - Form an opinion on the or C

Which of the following should be considered by the auditor in deciding which means (or combination of
means) to use in selecting items for testing?

I.      The risk of material misstatement related to the assertion being tested.

II.     Audit efficiency.

Ans C - Both I and II

Each of the following might, by itself, form a valid basis for an auditor to decide to omit a test except for
the

Ans A - Difficulty and expense involved in testing a particular item.

Audit Evidence

Which of the following generalizations in assessing the reliability of audit evidence is incorrect?

Ans B - Audit evidence that is generated internally is not affected by the effectiveness of the controls
imposed by the entity.

Which of the following terms is used in the standard to describe the effects on the financial statements
of misstatements or the possible effects on the financial statements, if any, that are undetected due to
an inability to obtain sufficient appropriate audit evidence?

Ans B - Pervasive

Which of the following types of audit evidence is the most persuasive?

Ans C - Bank statements obtained from the client.

Leadership responsibilities within the firm shall be assumed by the

Ans A - Chief executive officer

Audit information is usually considered relevant when it is

Ans D - Consistent with the audit objectives.

Which of the following statements concerning evidential matter is correct?

Ans D - A client's accounting data cannot be considered sufficient audit evidence to support the financial
statements.

Which of the following statements is incorrect regarding relevance of audit evidence?

Ans C - Obtaining audit evidence relating to a particular assertion is a substitute for obtaining audit
evidence regarding another assertion.

S1. The quantity of audit evidence needed is affected by the risk of misstatement and also by the quality
of such audit evidence.

S2.  The reliability of audit evidence is influenced by its source and by its nature and is dependent on the
individual circumstances under which it is obtained.

Ans A - Both statements are true.

Other information that the auditor may use as audit evidence least likely includes

Ans D - Adjustments to the financial statements that are not reflected in formal journal entries.

Which of the following generalizations does not relate to the appropriateness of evidence?
Ans B - An auditor’s opinion, to be economically useful, is formed within reasonable time and based on
evidence obtained at a reasonable cost.

Which of the following statements concerning evidential matter is true?

Ans D - A client’s accounting records cannot be considered sufficient evidence to support the financial
statements.

Which statement is incorrect regarding audit evidence?

Ans D - Auditors are expected to address all information that may exist.

The principal reason for an independent auditor to gather and evaluate audit evidence is to

Ans D - Form an opinion on the

Holding other planning considerations equal, a decrease in the amount of misstatement in a class of
transactions that an auditor could tolerate most likely would cause the auditor to

Ans B - Perform the planned auditing procedures closer to the balance sheet date

Accounting records least likely include

Ans D - Comparable data about competitors (benchmarking).

Which statement is correct regarding the sufficiency and appropriateness of audit evidence?

Ans C - The quantity of audit evidence needed is affected by the risk of misstatement (the greater the
risk, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the
higher the quality, the less may be required).

Audit Documentation / Working Paper - Assessment

Which of the following is not a purpose of working papers?

Ans D - Support the client’s financial statements.

Which of the following pairs of accounts would an auditor most likely analyze on the same working
paper?

Ans A - Notes receivable and interest income.

Which of the following conditions constitutes inappropriate working paper preparation?

Ans D - All forms and directives used by the auditee department are included in the working papers.

Working papers that record the procedures used by the auditor to gather evidence should be

Ans C - Designed to meet the circumstances of the particular engagement.

Which of the following eliminates voluminous details from the auditor’s working trial balance by
classifying and summarizing similar or related items?

Ans D - Lead schedules.

It  means  the  materials  prepared  by  and  for,  or  obtained  and  retained  by  the  auditor  in
connection with the performance of the audit.

Ans A - Documentation

Why does an auditor document audit evidence?

Ans C - To  support  audit  opinion  and  to  provide  evidence  that  the  audit  was  carried  out  in
accordance with PSA.

During the course of an audit engagement an auditor prepares and accumulates audit working papers.
The primary purpose of the audit working papers is to

Ans D - Support the auditor's opinion.

An auditor’s working papers will ordinarily be least likely to include documentation showing how the
Ans A - Client’s schedules were prepared.

Auditing Accounting Estimates - Assessment

It means an approximation of the amount of an item in the absence of a precise means of measurement

Ans A - Accounting estimate

In evaluating the assumptions on which the estimate is based, the auditor would need to pay particular
attention to assumptions which are

Ans D - Subjective or susceptible to material misstatement.

It is the responsibility of the auditor to evaluate the reasonableness of the accounting estimates made
by management.  Which one of the following approaches would the auditor not use when evaluating
the reasonableness of the estimate?

Ans C - Confirm the estimate with independent parties.

Which of the following is not an audit procedure that the independent auditor would perform with
respect to litigation, claims, and assessments?

Ans D - Confirm directly with the client’s lawyer that all claims have been recorded in the financial
statements.

Management prepares accounting estimates and the auditor is responsible for evaluating the
reasonableness of the estimates.  Which of the following would not be an auditor’s objective when
evaluating estimates?

Ans B - The accounting estimates developed by management are accurate with 100% certainty.

The auditor should adopt one or a combination of the following approaches in the audit of an
accounting estimate:

I.        Review and test the process used by management to develop the estimate.

II.      Use an independent estimate for comparison with that prepared by management.

III.    Review subsequent events which confirm the estimate made.

Ans A - Any of the above

Which of the following is an audit procedure that an auditor most likely would perform concerning
litigation, claims, and assessments?

Ans C - Discuss with management its policies and procedures adopted for evaluating and accounting for
litigation, claims, and assessments.

Related Parties - Assessment

Which one of the following is not a Field Work Standard?

Ans B - Due professional care.

The objective of the consistency standard is to provide assurance that

Ans D - The comparability of financial statements between periods in not materially affected by changes
in accounting principles without disclosure

The auditor’s judgment concerning the overall fairness of presentation of financial position, results of
operations, and changes in cash flow is applied within the framework of:

Ans D - generally accepted accounting principles.

Which of the following statements most accurately captures the intent of the standards of field work?

Ans C - Field work standards are primarily directed at the auditor’s planning, understanding of internal
control, and evidence accumulation.
Using the Work of an Expert - Assessment

Which statement is incorrect regarding the auditor’s use of the work of an expert?

Ans D - When the auditor uses the work of an expert employed by the auditor, that work is used in the
employee's capacity as an assistant on the audit.

Which of the following least likely requires the services of an expert?

Ans D - Application of accounting methods in computing inventory balances.

Which of the following statements is correct concerning an auditor’s use of the work of an expert?

Ans A - The work of an expert who is related to the client may be acceptable under certain
circumstances

A person or firm possessing special skill, knowledge and experience in a particular field other than
accounting and auditing is called a/an

Ans B - expert

When the auditor has to determine the need to use the work of an expert, he would least likely
consider:

Ans A - The cost of using the services of an expert.

Which of the following statements concerning the auditor’s use of the work of a specialist is true?

Ans B - If the specialist is related to the client, the auditor is still permitted to use the specialist’s findings
as corroborative evidence.

An expert may be:

Engaged by the entity

Engaged by the auditor

Employed by the entity

Employed by the auditor

Ans D -

Yes

Yes

Yes

Yes

Which of the following statements is correct about the auditor’s use of the work of an expert?

Ans D - The auditor should obtain an understanding of the methods and assumptions used by the expert

In using the work of a specialist, an auditor referred to the specialist’s findings in the auditor’s report.
This is an appropriate reporting practice if the

Ans B - Auditor, as a result of the specialist’s findings, adds an explanatory paragraph emphasizing a
matter regarding the financial statements.

Which of the following steps is an auditor most likely to take when using an expert to obtain assurance
concerning a material financial statement assertion?

Ans D - Assess the competence and objectivity of the expert

Considering the Work of Internal Auditing - Assessment

Which of the following statements in relation to the preliminary assessment of internal auditing is false?

Ans C - Effective internal auditing will often allows a modification in the nature, timing,  reduction in the
extent and even eliminate  in its entirety some procedures performed by the external auditor

When obtaining  an understanding and performing a preliminary assessment of  the internal audit
function, the auditor should consider the internal auditors’

  Organizational status Scope of Technical competence and due care

functions

Ans A - Yes Yes Yes

An independent appraisal activity established within an entity as a service to the entity is

Ans B - internal auditing

Which of the following is not an appropriate function of internal auditing?

Ans D - expressing an opinion about the fair presentation of the financial statements.

Which of the following is considered a primary reason for creating an internal audit department?

Ans A - To evaluate and improve the effectiveness of control processes.

Which of the following is most likely to be an audit area where a CPA places reliance on the work of a
client’s internal auditors?

Ans A - When assessing control risk

The scope and objectives of internal auditing vary widely and depend on the size and structure of the
entity and the requirements of its management.  Ordinarily, internal auditing activities include one or
more of the following, except

Ans C - Establishment of adequate accounting and internal control systems

Basic audit Sampling Concepts - Assessment

An error that arises from an isolated event that has not recurred other than on specifically identifiable
occasions and is therefore not representative of errors in the population is called

Ans C - Anomalous error.

The following situations will likely lead the auditor to use 100% testing, except

Ans D - When testing controls that leave audit trail.

The entire set of data about which the auditor wishes to draw conclusions is called

Ans A - Population.

Which of the following best illustrates the concept of sampling risk?

Ans A - A randomly chosen sample may not be representative of the population as a whole on the
characteristic of interest

Audit sampling is not involved in the following, except

Ans C - Selecting the sample without following a structured technique.

Which of the following is true about sampling and non-sampling risks?

Ans A - Sampling risk can be reduced by increasing sample size.

The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the
entire population were subjected to the same audit procedure is

Ans A - Sampling risk

Which of the following constitutes audit sampling?

Ans D - Applying audit procedures to less than 100% of items within an account balance or class of
transactions such that all sampling units have a chance of selection.

The entire set of data from which a sample is selected and about which the auditor wishes to draw
conclusions is

Ans A - Population

Audit sampling involves the

Ans B - Application of audit procedures to less than 100% of items within a class of transactions or an
account balance such that all items have a chance of selection.

Sampling risk that leads the auditor to conclude that controls are more effective than they are actually is

Ans A - Risk of assessing control risk too low

An auditor, planning an attribute sample from a large number of invoices, intends to estimate the actual
rate of deviations.  Which factor below is the most important for the auditor to consider?

Ans A - Audit objective

Factors Affecting Sample Design - Assessment

The likelihood of assessing control risk too low is the risk that the sample selected to test controls

Ans B - Does support the auditor’s planned assessed level of control risk when the true operating
effectiveness of the control does not justify such an assessment.

The tolerable rate of deviations for a test of controls is generally

Ans B - Higher than the expected rate of errors in the related accounting records.

The decision whether to use statistical or non-statistical sampling depends upon the

Ans B - Auditor’s judgment

The diagram below depicts the auditor’s estimated maximum deviation rate compared with the
tolerable rate and also depicts the true population deviation rate compared with the tolerable rate.

                                                                            True State of Population

Auditor’s

 Estimate                                       Deviation Rate                  Deviation Rate

Based on                                        Is less than                        Exceeds

Sample Results                            Tolerable Rate                     Tolerable Rate

Maximum                                                 

Deviation Rate                                 I                                        III  

 Is Less than

 Tolerable Rate

Maximum                                              

 Deviation Rate                                II                                       IV           

 Exceeds
 Tolerable Rate

As a result of tests of controls, the auditor assesses control risk higher than necessary and thereby
increases substantive testing.  This is illustrated by

Ans B - II

A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate
level of assurance that the monetary amount set by the auditor is not exceeded by the actual
misstatement in the population is

Ans A - Tolerable misstatement

Which of the following combinations results in a decrease in sample size in a sample for attributes?

1)   Risk of assessing control risk too low

2)   Tolerable   rate

3)   Expected population deviation rate

Ans C - 1)   Increase       2)   Increase       3)   Decrease

Which of the following best illustrates the concept of sampling risk?

Ans A - A randomly chosen sample may not be representative of the population as a whole on the
characteristic of interest.

While performing a substantive test of details during an audit, the auditor determined that the sample
results supported the conclusion that the recorded account balance was materially misstated. It was, in
fact, not materially misstated. This situation illustrates the risk of

Ans C - Incorrect rejection.

The size of a sample designed for dual-purpose testing should be

Ans A - The larger of the samples that would otherwise have been designed for the two separate
purposes

At times a sample may indicate that the auditor’s assessed level of control risk for a given control is
reasonable when, in fact, the true compliance rate does not justify the assessed level.

This situation illustrates the risk of

Ans A - Assessing control risk too low

An advantage of using statistical over non-statistical sampling methods in tests of controls is that the
statistical methods

Ans D - Provide an objective basis for quantitatively evaluating sample risk

Conducting a substantive test of an account balance, an auditor hypothesis that no material

misstatement exists. The risk that sample results will support the hypothesis when a material
misstatement actually does exist is the risk of

Ans C - Incorrect acceptance.

Population, as defined in PSA 530, means the entire set of data from which a sample is selected and
about which the auditor wishes to draw conclusions.  It is important for the auditor to ensure that the
population is

I.      Appropriate to the objective of the audit procedure.

II.     Complete.

Ans B - Both I and II

Factors Affecting Sample Size – Assessment

The entire set of data about which the auditor wishes to draw conclusions is called

Ans A - Population.

How would increases in tolerable misstatement and assessed level of control risk affect the sample size
in a substantive test of details?

Increase in tolerable Increase in assessed level of

misstatement control risk

Ans C – Decrease sample size Increase sample size

A number of factors influence the sample size for a substantive test of details of an account balance. All
other factors being equal, which of the following would lead to a larger sample size?

Ans C - Smaller measure of tolerable misstatement

Which of the following courses of action would an auditor most likely follow in planning a sample of
cash disbursements if the auditor is aware of several unusually large cash disbursements?

Ans B - Stratify the cash disbursements population so that the unusually large disbursements are
selected.

Which of the following combinations results in a decrease in sample size in a sample for attributes?

Risk of Tolerable Expected

assessing rate population
control risk too deviation rate
low

Ans C – Increase Increase Decrease

Which of the following sample planning factors would influence the sample size for a substantive test of
details for a specific account?

  Expected amount of misstatements Measure of tolerable misstatement

Ans B - Yes Yes

Sample Selection Methods - Assessment

Using statistical sampling to assist in verifying the year-end accounts payable balance, an auditor has
accumulated the following data:

  Number of Book Balance Determined by

 Accounts    Balance             the Auditor              

Population 4,100 P5,000,000 ?

Sample 200 P  250,000 P300,000

Using the ratio estimation technique, the auditor’s estimate of year-end accounts payable balance is

Ans B - P6,000,000

When the auditor goes through a population and selects items for the sample without regard to
their size, source, or other distinguishing characteristics, it is called

Ans C - Random sample

An auditor is applying a difference estimation sampling plan. Recorded book value is P1,000,000 and the
auditor estimates a P75,000 understatement difference. In this case, the auditor’s estimated population
value is
Ans B - P1,075,000

Which of the following courses of action would an auditor most likely follow in planning a sample of
cash disbursements if the auditor is aware of several unusually large cash disbursements?

Ans B - Stratify the cash disbursements population so that the unusually large disbursements are
selected.

In statistical sampling methods used in substantive testing, when would an auditor most likely stratify a
population into meaningful groups?

Ans A - If the population has highly variable recorded amounts.

If the auditor is concerned that a population may contain exceptions, the determination of a sample size
sufficient to include at least one such exception is a characteristic of

Ans A - Discovery sampling

Which of the following sampling methods would be used to estimate a numerical measurement of a
population, such as a peso value?

Ans C – Variables Sampling

When the auditor goes through a population and selects items for the sample without regard to their
size, source, or other distinguishing characteristics, it is called

Ans D - Haphazard selection

An auditor is applying mean-per-unit estimation. Assuming estimated audited value is P950,000, the
achieved allowance for sampling risk is P75,000, and recorded book value is P925,000, what is the
auditor's conclusion?

Ans A - Recorded book value is not likely misstated by a material amount.

An auditor wishes to sample 200 sales receipts from a population of 5,000 receipts issued during the last
year.  The receipts have preprinted serial numbers and are arranged in chronological (and thus serial
number) order.  The auditor randomly chooses a receipt from the first 25 receipts and then selects every
25th receipt thereafter.  The sampling procedure described here is called

Ans A - Systematic random sampling.

Which of the following statistical selection techniques is least desirable for use by an auditor?

Ans B - Stratified selection

Which of the following statistical sampling plans does not use a fixed sample size for tests of controls?

Ans B - Sequential sampling

A sample in which every possible combination of items in the population has an equal chance of
constituting the sample is a

Ans C - Random sample

Evaluation of Sample Results - Assessment

The likelihood of assessing control risk too high is the risk that the sample selected to test controls

Ans A - Does not support the auditor’s planned assessed level of control risk when the true operating
effectiveness of the control justifies such an assessment.

In determining the sample size for a test of controls, an auditor should consider the likely rate of
deviations, the allowable risk of assessing control risk too low, and the

Ans A - Tolerable deviation rate

A statistical sampling technique that will minimize sample size whenever a low deviation rate is
expected is

Ans D - Stop-or-go sampling.

As a result of sampling procedures applied as tests of controls, and auditor incorrectly assess control risk
lower than appropriate. The most likely explanation for this situation is that

Ans C - The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in
the population exceeds the tolerable rate

An auditor is testing internal control procedures that are evidenced on an entity’s vouchers by matching
random numbers with voucher numbers. If a random number matches the number of a voided voucher,
that voucher ordinarily should be replaced by another voucher in the random sample if the voucher

Ans B - Has been properly voided

When using classical variables sampling for estimation, an auditor normally evaluates the sampling
results by calculating the possible error in either direction.  This statistical concept is known as

Ans A - Precision.

Which of the following most likely would be an advantage in using classical variables sampling rather
than probability-proportional-to-size (PPS) sampling?

Ans C - Inclusion of zero and negative balances generally does not require special design considerations.

When using classical variables sampling for estimation, an auditor normally evaluates the sampling
results by calculating the possible error in either direction. This statistical concept is known as

Ans A - Precision.

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan
more work on individual accounts to

Ans A - Find smaller misstatements.

The risk of incorrect acceptance and the risk of assessing control risk too low relate to the

Ans D - Effectiveness of the audit

Per PSA 530, projection of sample results to the population, is only necessary in the case of

A.       Deviations (test of controls)

b.       Misstatement (test of details)

Ans D - Neither A or B

An auditor wants to select a statistically representative sample from a population of 475 inventory
control sheets. Each sheet lists the description, physical count, bar code, and unit cost for 50 inventory
items. The auditor uses a random number table to construct the sample; the first two columns are listed
below. 14326 is the randomly chosen starting point; the sample’s first item is found on page 143, line
26. (The route used by the auditor is down Column A to the top of Column B.)

Column A              Column B

                75233                    06852

                14326                    42904

                76562                    64854

                28123                    04978

                64227                    33150

                80938                    04301

                22539                    41240

                29452                    69521

Where is the fifth item in the sample located?

Ans C - Page 331, line 50.

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an
auditor to

Ans D - Measure the sufficiency of the evidential matter obtained.

An advantage of statistical over nonstatistical sampling methods in tests of controls is that the statistical
methods

Ans B - Provide an objective basis for quantitatively evaluating sampling risks.

The tolerable rate of deviation for tests of controls necessary to justify a control risk assessment
depends primarily on which of the following?

Ans B - The extent of reliance to be placed on the procedures.

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The
auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99%
confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from
previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices
was examined and 7 of them were lacking approval. The auditor then determined the achieved upper
precision limit to be 8%. In the evaluation of this sample, the auditor decided to increase the level of the
preliminary assessment of control risk because the

Ans A - Tolerable rate (7%) was less than the achieved upper precision limit (8%)

Statistical sampling may be applied to test controls when a client’s control procedures

Ans C - Leave an audit trail as evidence of compliance.

Assessing control risk too high is the risk that the sample

Ans B - Contains proportionately more deviations from prescribed control procedures than actually exist
in the population as a whole.

The estimate of the population peso value using ratio estimation is __________.

Ans D - P5,720,000

When an auditor’s sampling objective is to obtain a measurable assurance that a sample will contain at
least one occurrence of a specific critical exception existing in a population, the sampling approach to
use is

Ans B - Discovery.

Tests of controls provide reasonable assurance that controls are applied as prescribed.  A sampling
method that is useful when testing controls is:

Ans B - Attribute estimation sampling

An auditor is evaluating the results of a variables sampling plan. Which of the following is not relevant to
the auditor's judgment about the sample?

Ans A - Management's explanations for why errors in the sample occurred.

The estimate of the population peso value using difference estimation sampling is __________.

Ans D - P5,700,000

An auditor is preparing to sample accounts receivable for overstatement.  A statistical sampling method
that automatically provides stratification when using systematic selection is

Ans C - Probability proportionate to size sampling

For which of the following audit tests would an auditor most likely use attribute sampling?
 Ans D - Inspecting employee time cards for proper approval by supervisors.

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control
risk lower than appropriate.  The most likely explanation for this situation is that

Ans C - The deviation rate in the auditor’s sample is less than the tolerable rate, but the deviation rate in
the population exceeds the tolerable rate.

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the

Ans D - Effectiveness of the audit

When would difference estimation or ratio estimation sampling methods be inappropriate?

Ans C - If differences between the book value and audit value of a population are numerous. Or A

Conducting a substantive test of an account balance, an auditor hypothesis that no material

misstatement exists.  The risk that sample results will support the hypothesis when a material
misstatement actually does exist is the risk of

Ans C - Incorrect acceptance.

An auditor plans to test a sample of 20 checks for counter signatures as prescribed by the client’s control
procedures.  One of the checks in the chosen sample of 20 cannot be found.  The auditor should
consider the reasons for this limitation and

Ans B - Treat the missing check as a deviation for the purpose of evaluating the sample.

Which of the following sampling methods is used to estimate a numerical measurement of a population,
such as a peso value?

Ans C - Variables sampling.

Which of the following statements is not correct?

Ans D - An advantage of using statistical sampling is that the cost/benefit ratio is always positive.

One of the audit objectives for a manufacturing company is to verify that all rework is reviewed by the
production engineer.  Which of the following audit procedures would provide the best evidence for
meeting this objective?

Ans D - Trace a sample of rework orders to entries in the review log.

An auditor uses a number of techniques to select samples. A frequently, and appropriately, used
technique is random selection. In which of the following situations would random selection be least
justified? The auditor needs to

Ans C - Obtain evidence on the proper sales cut-off by sampling items from the monthly sales journal to
determine if the items were recorded in the correct time period.

In estimation sampling for variables, which of the following must be known in order to estimate the
appropriate sample size required to meet the auditor’s needs in a given situation?

Ans B - The total peso amount of the population

If a selected random number matches the number of a voided voucher, the voucher ordinarily should be
replaced by another voucher in the sample if the voucher

Ans B - Has been properly voided

The diagram below depicts the auditor’s estimated maximum deviation rate compared with the
tolerable rate, and also depicts the true population deviation rate compared with the tolerable rate.

True State of Population

Auditor’s Estimate Based on Deviation Rate Exceeds      Deviation Rate is

         Sample Results            Tolerable Rate Less

     Than Tolerable Rate

Maximum Deviation Rate    

Exceeds Tolerable Rate
                    I                   III

Maximum Deviation Rate is    

Less Than Tolerable Rate
                    II                   IV

Ans C - III.

Since auditors are interested in the occurrence of exceptions in population, they refer to the occurrence
as

Ans C - Deviation rate

After partially completing a control review of the accounts payable department, an auditor suspects that
some type of fraud has occurred. To ascertain whether the fraud is present, the best sampling approach
is to use

Ans C - Discovery sampling to select a sample of vouchers processed by the department during the past
year.

Which of the following engagement objectives will be accomplished by tracing a sample of accounts
receivable debit entries to customer invoices and related shipping documents?

Ans C - Accounts receivable represent valid sales.

The next 3 questions are based on the following information:

An auditor has obtained the following data by selecting a random sample from an inventory population:

                 Number        Audited       Carrying

                 Of Items        Value          Amount

Sample                  200           P220,000    P 200,000

Population            5,000         ?                   P5,200,000

The estimate of the population peso value using mean-per-unit sampling is __________.

Ans C - P5,500,000

When sampling for attributes, which of the following would decrease sample size?

 Risk of Tolerable           Expected             

assessing rate population

Control risk too    of        deviation rate

low deviation

Ans C - Increase                             Increase                   Decrease

“Whenever a sample is taken, there is a risk that the quantitative conclusions about the population will
be incorrect.”

Ans B - This is always true unless 100 percent of the population is tested.
In applying variables sampling, an auditor attempts to

Ans D - Predict a monetary population value within a range of precision.

Each time an auditor draws a conclusion based on evidence from a sample, an additional risk, sampling
risk, is introduced.  An example of sampling risk is

Ans D - Drawing an erroneous conclusion from sample data.

Several risks are inherent in the evaluation of audit evidence that has been obtained through the use of
statistical sampling.  An example of a beta or Type II error related to sampling risk is the failure to

Ans C - Reject the statistical hypothesis that a book value is not materially misstated when the true book
value is materially misstated.

Subsequent Events - Assessment

Which of the following conditions or events most likely would cause an auditor to have substantial
doubt about an entity’s ability to continue as a going concern?

Ans A - Cash flows from operating activities are negative.

Which of the following procedures would an auditor most likely perform to obtain evidence about the
occurrence of subsequent events?

Ans A - Inquiring as to whether any unusual adjustments were made after the date of the financial
statements.

Which of the following statements best describes the “date of the financial statements?”

Ans C - The date of the end of the latest period covered by the financial statements, which is normally
the date of the most recent balance sheet in the financial statements subject to audit.

Which of the following procedures would an auditor most likely perform to obtain evidence about an
entity’s subsequent events?

Ans D - Obtain a letter from the entity’s attorney describing any pending litigation, unasserted claims, or
loss contingencies.

PSA 570 (Going Concern) states that a fundamental principle in the preparation of financial statements
is the going concern assumption.  Under this assumption, an entity is ordinarily viewed as continuing in
business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing
trading or seeking protection from creditors pursuant to laws and regulations.  The responsibility to
make an assessment of an entity’s ability to continue as a going concern rests with the

Ans B - Entity’s management

Harold, CPA, believes there is substantial doubt about the ability of Jersamtan Co. to continue as a going
concern for a reasonable period of time.  In evaluating Jersamtan’s plans for dealing with the adverse
effects of future conditions and events, Harold most likely would consider, as a mitigating factor,
Jersamtan’s plans to

Ans A - Postpone expenditures for research and development projects.

After issuing a report, an auditor has no obligation to make continuing inquiries or perform other
procedures concerning the audited financial statements, unless

Ans D - Information, which existed at the report date and may affect the report, comes to the auditor’s
attention.

As used in PSA 560 (Subsequent Events), the term “subsequent events” refers to

I.      Events occurring between the date of the financial statements and the date of the auditor’s report.

II.     Facts discovered after the date of the auditor’s report.

Ans C - Both I and II.

When an auditor concludes that there is substantial doubt about a continuing audit client’s ability to
continue as a going concern for a reasonable period of time, the auditor’s responsibility is to

Ans A - Consider the adequacy of disclosure about the client’s possible inability to continue as a going
concern.

By definition, subsequent events  for reporting purposes occur between:

Ans A - the balance sheet date and the report date.

After an audit report containing an unmodified opinion on a client’s financial statements was issued, the
client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net
income. The auditor should

Ans D - Take no action because the auditor has no obligation to make any further inquiries

Which of the following statements best expresses the auditor’s responsibility with respect to facts
discovered after the date of the auditor’s report but before the date the financial statements are
issued?

Ans C - The auditor should consider whether the financial statements need amendment, discuss the
matter with management, and consider taking actions appropriate in the circumstances.

Which of the following events occurring after the issuance of an auditor’s report most likely would cause
the auditor to make further inquiries about the previously issued financial statements?

Ans C - The discovery of information regarding a contingency that existed before the financial
statements were issued.

Which of the following statements best describes the auditor’s responsibility concerning the
appropriateness of the going concern assumption in the preparation of the financial statements?

Ans C - The auditor’s responsibility is to consider the appropriateness of management’s use of the going
concern assumption and consider whether there are material uncertainties about the entity’s ability to
continue as a going concern that need to be disclosed in the financial statements.

Which of the following audit procedures would most likely assist an auditor in identifying conditions and
events that may indicate there could be substantial doubt about an entity’s ability to continue as a going
concern?

Ans D - Review of compliance with terms of debt agreements.

Related Parties - Assessment

An auditor searching for related party transactions should obtain an understanding of each subsidiary’s
relationship to the total entity because

Ans C - The business structure may be deliberately designed to obscure related party transactions.

After determining that a related party transaction has, in fact, occurred, an auditor should 

Ans A - Obtain an understanding of the business purpose of the transaction.

When auditing related party transactions, the auditor place primary emphasis on

Ans C - proper accounting for, and disclosure of, the related party transactions

Which of the following auditing procedures most likely would assist an auditor in identifying related-
party transactions?

Ans C - Reviewing confirmations of loans receivable and payable for indications of guarantees.

Which of the following events most likely indicates the existence of related parties?

Ans A - Making a loan without scheduled terms for repayment of the funds.

The auditor should review information provided by those charged with governance and management
identifying
I.      The names of all known related parties.

II.     Related party transactions.

Ans C - Both I and II.

Which of the following statements is true about related party transactions?

Ans D - The audit procedures directed toward identifying related party transactions should include
considering whether transactions are occurring but are not being given proper accounting recognition.

The responsibility for the identification and disclosure of related parties and transactions with such
parties rests with the

Ans B - entity’s management

Litigation, Claims and Assessments - Assessment

Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims,
and assessments most likely would cause the auditor to request clarification?

Ans A - “I believe that the action can be settled for less than the damages claimed.”

The primary source of information to be reported about litigation, claims, and assessments is the

Ans B - Client’s management

The primary reason an auditor requests that letters of inquiry be sent to a client’s attorneys is to provide
the auditor with

Ans C - Corroboration of the information furnished by management about litigation, claims, and
assessments.

In which of the following circumstances would an auditor most likely meet with the client’s legal counsel
to discuss the likely outcome of the litigation and claims?

I.      The auditor determines that the matter is a significant risk.

II.    There is a disagreement between management and the entity’s legal counsel.

III.   The subject matter of the litigation is complex.

Ans D - I, II, and III.

Management’s refusal to give the auditor permission to communicate with the entity’s legal counsel is
most likely to lead to

Ans D - A qualified opinion or a disclaimer of opinion.

The auditor is required to obtain audit evidence that management

I.      Acknowledges its responsibility for the fair presentation of the financial statements in accordance
with applicable financial reporting                      framework.

II.     Has approved the financial statements.

Ans C - Both I and II.

The auditor should consider the status of legal matters up to the

Ans B - Date of the auditor’s report.

The refusal of a client’s lawyer to provide a representation on the legality of a particular act committed
by the client is ordinarily
Ans C - Considered to be a scope limitation.

The letter of audit inquiry should be

Ans B - Prepared by management and sent by the auditor.

Management Representation Letter - Assessment

Which of the following statements concerning management representations is incorrect?

Ans A - Representations by management can be a substitute for other audit evidence that the auditor
could reasonably expect to be available.

A written representation from a client’s management that, among other matters, acknowledges
responsibility for the fair presentation of financial statements, should normally be signed by the

Ans B - Chief executive officer and the chief financial officer.

“There have been no communications from regulatory agencies concerning noncompliance with, or
deficiencies in, financial reporting practices that could have a material effect on the financial
statements.”  The foregoing passage is most likely from a

Ans C - Management representation letter.

When considering the use of management’s written representations as audit evidence about the
completeness assertion, an auditor should understand that such representations

Ans D - Complement, but do not replace, substantive tests designed to support the assertion.

What type of opinion should be expressed if the client’s management refuses to provide a
representation that the auditor considers necessary?

Ans A - Qualified opinion or a disclaimer of opinion.

If management refuses to furnish certain written representations that the auditor believes are essential,
which of the following is appropriate?

Ans C - This may have an effect on the auditor’s ability to rely on other representations of management.

The auditor is required to obtain audit evidence that management

I.      Acknowledges its responsibility for the fair presentation of the financial statements in accordance
with applicable financial reporting                      framework.

II.     Has approved the financial statements.

Ans C - Both I and II.

When an audit is made in accordance with generally accepted auditing standards, the auditor should
always

Ans B - Obtain certain written representations from management.

The date of the management representation letter should coincide with the date of the

Ans C - Auditor’s report

Which of the following is responsible for the fairness of the representations made in financial
statements?

Ans A - Client's management

Wrap-up Procedures (final analytical procedures, going concern) - Assessment

The primary objective of analytical procedures used in the final review stage of an audit is to

Ans C - Assist the auditor in assessing the validity of the conclusions reached.
Analytical procedures used in the overall review stage of an audit generally include

Ans C - Considering unusual or unexpected account balances that were not previously identified

Which of the following is true?

Ans C - The auditor should evaluate management’s assessment of the entity’s ability to continue as a
going concern.

Post-Audit Responsibilities - Assessment

An auditor concludes that the omission of a substantive procedure considered necessary at the time of
the examination may impair the auditor's present ability to support the previously expressed opinion. 
The auditor need not apply the omitted procedure if

Ans B - The results of other procedures that were applied tend to compensate for the procedure
omitted.

An auditor concludes that a substantive auditing procedure considered necessary during the prior
period’s audit was omitted.  Which of the following factors would most likely cause the auditor promptly
to apply the omitted procedure?

Ans B - The omission of the procedure impairs the auditor’s present ability to support the previously
expressed opinion.

Audit Reports on Financial Statements

Basic Elements of the Unqualified Auditor's Report - Assessment

The auditing profession recognizes the need for uniformity in reporting as a means of

Ans D - promoting credibility of the report in the global marketplace

The introductory paragraph of the auditor’s report should

Ans D - identify the name of the entity for whom the report is prepared.

In which of the following circumstances may the auditor issue an unqualified standard audit report?

Ans C - The auditor relies on the report of another auditor.

The element of the auditor's report that distinguishes it from reports that might be issued by others is

Ans A - Title

The audit report date is important to users because it indicates the

Ans B - Last day of the auditor’s responsibility for the review of significant events that occurred after the
date of the financial statements.

Identify the appropriate type of opinion to issue when the auditor is satisfied that there is a remote
likelihood of a loss resulting from the resolution of an uncertainty.

Ans A - Unqualified opinion.

The date of the audit report is important because

Ans A - The user has a right to expect that the auditor has performed certain procedures to detect
subsequent events that would materially affect the financial statements through the date of the report

Which is not referred to in the management’s responsibility paragraph?

Ans B - Effectiveness and efficiency of operating decisions

Which among the following is not an appropriate addressee of an independent auditor’s report?

Ans D - President of the client company

Which of the following  is not one of the basic elements of the auditor’s report

Ans C - Client’s address

The introductory paragraph of the standard audit report may include the following:

I.              Identification of the entity whose financial statements have been audited.

II.            Statement that the financial statements have been audited.

III.          Title of each of the financial statements that comprise the complete set of financial statements.

IV.         Reference to "basic financial statements" without indicating the title of each of the financial
statements.

V.           Reference to the summary of significant accounting policies and other explanatory notes

VI.         Specific date and period covered by the financial statements.

VII.       Reference to Philippine Standards on Auditing.

Which of the foregoing are specifically required by the applicable standards on auditing to be included
or referred to in the introductory paragraph of the standard audit report?

Ans C - I, II, III, V, VI

The audit report should not be dated

Ans A - Earlier than the date on which the auditor obtains sufficient appropriate evidence

Which of the following statements is not included in the auditor’s responsibility section of the standard
audit report?

Ans D - that audit includes examining on a test-basis evidence supporting the amounts and disclosures in
the financial statements.

The auditor may address the report to all of the following, except:

Ans B - the President and/or CEO of client company

Which of the following is not usually the addressee in an external audit report?

Ans C - Management in audit of public company

Per PSA 700, the auditor’s report should be addressed

Ans D - Either to the shareholders or the board of directors of the entity whose financial statements are
being audited

The auditor s report should describe an audit by addressing some concerns that may include:

I.              An audit includes evaluating the appropriateness of the accounting policies used.

II.            An audit includes evaluating the reasonableness of accounting estimates made by

management.

III.          Evaluating the overall presentation of the financial statements.

IV.         An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements.

V.           The procedures selected depend on the auditor's judgment.

Which of the foregoing concerns are stated in the audit report?

Ans A - I, II, III, IV, V

The auditor's standard report states that the financial statements are presented fairly

Ans B - in all material respects.

The introductory paragraph of the auditor’s report should

Ans D - Refer to the summary of significant accounting policies and explanatory notes

An auditor refers to significant related party transactions in a middle paragraph of the report.  If the
ensuring opinion paragraph contains the words, “with the foregoing explanation,” the auditor’s report
would be considered a (an)

Ans B - Example of inappropriate reporting.

Which of the following statements is a basic element of the standard audit report?

Ans C - An audit includes assessing significant estimates made by the management

Matters That Affect The Auditor's Unqualified Opinion - Assessment

A qualified opinion is expressed when a misstatement is

Ans A - Material

An explanatory paragraph may be added to the audit report while at the same time issuing an
unqualified opinion in all cases except when:

Ans D - the audit work has been materially limited by management.

An auditor who qualifies an opinion because of an insufficiency of evidence should describe the
limitation in an explanatory paragraph.  The auditor should also modify the

(1) Auditor’s responsibility paragraph

(2) Opinion paragraph

(3) Notes to the financial statements

Ans D - (1) Yes     (2) Yes     (3) No

If the scope of the examination has been satisfactory for all items except for one of material amount,
the auditor should issue a (an)

Ans B - Qualified opinion.

If the financial statements, including accompanying notes, fail to disclose information that is required by
PFRSs, the auditor should express either a(an)

Ans B - Adverse opinion or a “subject to” qualified opinion.

A CPA engaged to examine financial statements observes that the accounting for a certain material item
is not in conformity with generally accepted accounting principles, and that this fact is prominently
disclosed in the notes to the financial statements.  The CPA does not agree with this departure from
PFRS and should

Ans C - Qualify the opinion because of the deviation from generally accepted accounting principles.

When an auditor issues an adverse opinion, the implication is that the auditor

Ans B - Does not believe the statements are fairly presented.

Which of the following circumstances may not result to a disclaimer of opinion?

Ans C - The accounts receivable of the client comprised 80 percent of the total assets.   The auditor was
instructed by the client not to confirm account balances. The auditor however was satisfied by the
results of alternative audit procedures

Per Glossary of Terms, it is a difference between the amount, classification, presentation, or disclosure
of a reported financial statement item and the amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable financial reporting framework.

Ans D - Misstatement

In extreme cases such as situations involving multiple uncertainties that are significant to the financial
statements, the auditor

Ans A - may consider to express a disclaimer of opinion

If an auditor is not independent of a client, the auditor should issue a(an)

Ans C - disclaimer of opinion

Addition of an "emphasis of a matter" paragraph to what remains an unqualified opinion is least likely
for which of the following situations?

Ans B - Scope limitation.

Under which of the following sets of circumstances might an auditor disclaim an opinion?

Ans D - There were significant limitations on the scope of the audit.

An explanatory paragraph reads as follows:

The Company has adopted the first-in, first-out method of determining inventory costs, whereas it
previously used the weighted average method. Athough use of the first-in, first-out method is in
conformity with generally accepted accounting principles, in our opinion the Company has not provided
reasonable justification for seeking a change as required by BIR.

The paragraph likely appears in:

Ans C - A qualified opinion

In which of the following circumstances would an auditor usually choose between issuing a qualified
opinion of a disclaimer of opinion?

Ans C - Inability to obtain sufficient competent evidential matter.

When disclaiming an opinion due to a client-imposed scope limitation, an auditor should indicate in a
separate paragraph why the audit did not comply with PSAs.  The auditor should  also omit the

(1) Auditor’s responsibility paragraph

(2) Opinion paragraph

Ans D - (1) Yes     (2) No

The principal auditor is satisfied with the independence and professional reputation of the other auditor
who has audited a subsidiary but wants to indicate the division of responsibility.  The principal auditor
should

Ans D - Modify the introductory, auditor’s responsibility and opinion paragraphs of the report

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going
concern.  If the entity's disclosures about continued existence are adequate, the audit report should
include
(1) A disclaimer of opinion

(2) An unqualified opinion

Ans C - (1) No     (2) Yes

A choice between qualified or adverse opinion is made when the cause of misstatement is

I.      Material disagreement with management on PFRS application (PFRS departure)

 II.    Inability to gather sufficient appropriate evidence because of restriction on procedures (scope

limitation)

Ans A - I only

A departure from PFRS is disclosed in a note to the financial statements.  The auditor should:

Ans C - Issue a qualified opinion

An adverse opinion would be issued when a misstatement’s impact is

Ans C - Highly material

Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35%
of all assets.  Alternative audit procedures cannot be applied, although the auditor was able to examine
satisfactory evidence for all other items in the financial statements.  The auditor should issue a(an)

Ans B - Disclaimer of opinion.

An auditor may reasonably issue an “except for” qualified opinion for

(1) Inadequate disclosure

(2) Scope limitation

Ans A - (1) Yes     (2) Yes

Which of the following situation, the effect of which is significant, least likely require a decision of
whether to issue a qualified or adverse opinion?

Ans B - Limitation on the scope of the auditor's work.

When the financial statements contain a departure from PFRS, the effect of which is material, the
auditor should

Ans A - Qualify the opinion and explain the effect of the departure from PFRS in a separate paragraph.

Under which of the following circumstances would a disclaimer of opinion not be appropriate?

Ans C - The financial statements fail to contain adequate disclosure concerning related party
transactions.

If the auditor is unable to determine whether fraud or error has occurred because of limitations
imposed by the circumstances, the auditor would most likely issue a report that contains:

Ans C - a qualified opinion 

When financial statements are presented wherein accounting principles have not been applied
consistently, an auditor, may issue a(an):

(1)  Qualified Opinion
 

(2)  Disclaimer of opinion

Ans C - (1) Yes     (2) No

Which of the following statements indicates a qualified opinion?

Ans D - Except for the effects of a matter, the financial statements present fairly in all material respects
the financial position, results of operations, and cash flows in conformity with GAAP.

An auditor may not issue a qualified opinion when

Ans D - The auditor lacks independence with respect to the audited entity.

An adverse opinion would be issued when a misstatement’s impact is

Ans A - Immaterial

Should the auditor uncover circumstances during the audit that may cause suspicions of management
fraud, the auditor must

Ans C - evaluate their implications and consider the need to modify audit procedures

Matters That Do Not Affect The Auditor's Unqualified Opinion - Assesment

Grant Company’s financial statements adequately disclosed uncertainties that concern future events,
the outcome of which are not susceptible of reasonable estimation.  The auditor’s report should include
a(an)

Ans A - Unqualified opinion.

When the financial statements contain material departures from PFRS and the auditor modifies the
opinion, the auditor describes the effects in

Ans B - In a separate explanatory paragraph

If the current periods accounting policies have not been consistently applied in relation to the opening
balances and if the change has not been properly accounted for and disclosed, the auditor’s report may
include:

(1) Qualified Opinion;

(2) Adverse Opinion;

(3) Disclaimer of Opinion

Ans C - (1) Yes;     (2) Yes;     (3) No

Which of the following does not result to modification of opinion on financial statements?

Ans C - Limitations that are beyond the control of management.

The introductory paragraph of an auditor’s report contains the following sentences:

We did not audit the financial statements of EZ Inc., a wholly-owned subsidiary, which statements
reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the related
consolidated totals.  Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the
report of the other auditors.
These sentences

Ans A - Indicate division of responsibility.

When there are multiple uncertainties significantly affecting the financial statements, the auditor’s
report would most likely contain

Ans C - A disclaimer of opinion

If the auditor is unable to sufficient appropriate evidence concerning the opening balances, the auditor’s
report should include:

(1) Qualified Opinion;

(2) Adverse Opinion;

(3) Disclaimer of Opinion

Ans A - (1) Yes;     (2) No;     (3) Yes

Which of the following statements is correct about “emphasis of a matter paragraph”?

Ans B - The addition  of such paragraph does not affect the auditor’s opinion.

When a principal auditor decides to make reference to another auditor’s examination, the principal
auditor’s report should always indicate clearly, in the introductory, auditor’s responsibility, and opinion
paragraphs, the

Ans D -Division of responsibility.

PSA 701 provides guidance on the:

Ans C - auditor’s report that contains an opinion other than unqualified and/or a modified report due to
an emphasis of matter

Which of the following is a matter that do not affect the auditor’s opinion?

Ans A - Emphasis of matter

In which of the following situations would an auditor ordinarily issue an unqualified audit opinion
without an explanatory paragraph?

Ans B - The auditor decides to make reference to the report of another auditor as a basis, in part, for the
auditor’s opinion.

The auditor’s report on financial statements include the following sentences:

“………………………………… we draw attention to Note X to the financial statements. The Company is the

defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive
damages. The Company has filed a counter action, and preliminary hearings and discovery proceedings
on both actions are in progress. The ultimate outcome of the matter cannot presently be determined,
and no provision for any liability that may result has been made in the financial statements.”

The above statement:

Ans A - is a qualification of an opinion

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the
entity being reported on had significant transactions with related parties.  The inclusion of this separate
paragraph
Ans D - Is appropriate and would not negate the unqualified opinion.

 An auditor may not be able to express an unqualified opinion when  the following circumstances exist
and, in the auditor’s judgment, the effect of the matter is or may be material to the financial statements:

(1) There is a limitation on the scope of the auditor’s work;

(2) There is a disagreement with management regarding the acceptability of the accounting policies
selected, the method of their application or the adequacy of financial statement disclosures.

(3) The auditor wants to give emphasis to an important matter affecting the financial statements

Ans B - (1) Yes;     (2) Yes;     (3) No

An auditor may reasonably issue a  qualified opinion for

(1) Disagreement with management regarding accounting policies;

(2) Scope Limitation

Ans A - (1) Yes;     (2) Yes

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going
concern.  If the entity's disclosures about continued existence are adequate, the audit report should
include

(1) A disclaimer of opinion

(2) A qualified opinion

Ans B - (1) No;     (2) No

King, CPA, was engaged to audit the financial statements of Newton Company after its fiscal year had
ended.  King neither observed the inventory count nor confirmed the receivables by direct
communication with debtors, but was satisfied concerning both after applying alternative procedures. 
King’s auditor’s report most likely contained a(an)

Ans C - Unqualified opinion.

A qualified opinion should be expressed as being:

Ans A - “except for” the effects of the matter to which the qualification relates

An explanatory paragraph reads as follows:

On October 15, 2007, the Company emerged from bankruptcy. As discussed in the notes the financial
statements, the Company accounted for the reorganization using “fresh accounting” and, as a result, the
post-reorganization financial statements are not comparable to the pre-organization financial
statements
The paragraph likely is intended to:

 Ans B - Emphasize a matter

The emphasis of a matter paragraph is normally placed:

Ans C - After the opinion paragraph but before the section containing other reporting responsibilities.

Grant Company’s financial statements adequately disclose uncertainties that concern future events, the
outcome of which are not reasonably estimable. The auditor’s report should include a (an)

Ans A – Unmodified Opinion

Eagle Company’s financial statements contain a departure from PFRSs because, due to unusual
circumstances, the statements would otherwise be misleading.  The auditor should express an opinion
that is

Ans B - Unqualified and describe the departure in a separate paragraph.

Principal Auditor - Assessment

The current period's auditor who did not audit the prior period's financial statements is called

Ans C - Incoming auditor

Principal auditor is

Ans D - The auditor with responsibility for reporting on the financial statements of an entity when those
financial statements include financial information of one or more components audited by another
auditor.

Relying on the Work of Other Auditors - Assessment

All of the following are considered modification of the report except

Ans D - Report on consolidated financial statements where the principal auditor assumes responsibility
for the work of another auditor

If the principal auditor decides to refer in the report to the audit made by another auditor

Ans C - The other auditor is responsible for his report and his work

In which of the following circumstances may the auditor issue an unqualified standard audit report? 

Ans C - The auditor relies on the report of another auditor.

When part of the examination is to be performed by another auditor, the principal auditor may decide
to assume responsibility for the other auditor’s work and make no reference to such work when:

Ans D - The other auditor was retained by the principal auditor and worked under his supervision

Principal auditor is

Ans D - The auditor with responsibility for reporting on the financial statements of an entity when those
financial statements include financial information of one or more components audited by another
auditor.

When using the work of another auditor, the principal auditor should ordinarily perform the following
procedure

Choices:

a) Obtain information regarding the professional competence of the other auditor in the context of
the specific assignment undertaken by the other auditor.
b) Advise the other auditor of the applicable independence requirements as regards both the
entity and the component and obtain representation as to his compliance with them.
 c) Advise the other auditor of the applicable accounting, auditing and reporting requirements and
obtain representation as to compliance with them.

Ans D - All of the above.

Assume that Mr. Swabe, a principal auditor, decided to refer in his report the examination of another
auditor, he is required to disclose the

Ans A - Portion of the financial statements examined by the other auditor.

Comparative Financial Statements - Assessment

An auditor expressed a qualified opinion on the prior year's financial statements because of a lack of
adequate disclosure. These financial statements are properly restated in the current year and presented
in comparative form with the current year's financial statements. The auditor's updated report on the
prior year's financial statements should

Ans D - Express an unqualified opinion on the restated financial statements of the prior year.

They are presented as complete financial statements capable of standing alone, but not an integral part
of the current period financial statements intended to be read nly in relationship to the current period
figures.

Ans B - Comparative financial statements

Unaudited financial statements for the prior year presented in comparative form with audited financial
statements for the current year should be clearly marked to indicate their status and

I.              The report on the prior period should be reissued to accompany the current period report.

II.            The report on the current period should include as a separate paragraph a description of the
responsibility assumed for the prior period's financial statements.

Ans D - Either I or II.

They are not presented as complete financial statements capable of standing alone, but are an integral
part of the current period financial statements intended to be read only in relationship to the current
period figures.

Ans A - Corresponding figures

Jewel, CPA, audited Infinite Co.’s prior year financial statements. These statements are presented with
those of the current year for comparative purposes without Jewel’s auditor’s report, which expressed a
qualified opinion. In drafting the current year’s auditor’s report, Grain, CPA, the successor auditor,
should

I.                    Not name Jewel as the predecessor auditor.

II.                  Indicate the type of report issued by Jewel.

III.                Indicate the substantive reasons for Jewel’s qualification.

Ans D - I, II, and III

A client is presenting comparative (two- year) financial statements. Which of the following is correct
concerning reporting responsibilities of a continuing auditor

Ans A - The auditor should issue one audit report that is on both presented years.

When reporting on comparative financial statements, an auditor ordinarily should change the previously
issued opinion on the prior year's financial statements if the

Ans A - Prior year's financial statements are restated to conform with generally accepted accounting
principles.

Before reissuing the prior year's auditor's report on the financial statements of a former client, the
predecessor auditor should obtain a letter of representations from the
(1) Former client's management

(2) Successor auditor

Ans A - (1) Yes;     (2) Yes

An auditor’s report on comparative financial statements should be dated as of the date of the

Ans B - Completion of the auditor’s recent field work.

The predecessor auditor, who is satisfied after properly communicating with the successor auditor, has
reissued a report because the audit client desires comparative financial statements. The predecessor
auditor's report should make

Ans D - No reference to the report or the work of the successor auditor.

A client is presenting comparative (two-year) financial statements. Which of the following is correct
concerning reporting responsibilities of a continuing auditor?

Ans A - The auditor should issue one audit report that is on both presented years.

Unaudited financial statements for the prior year presented in comparative form with audited financial
statements for the current year should be clearly marked to indicate their status and

I.              The report on the prior period should be reissued to accompany the current period report.

II.            The report on the current period should include as a separate paragraph a description of the
responsibility assumed for the prior period's financial statements.

Ans D - Either I or II.

Unaudited financial statements for the prior year presented in comparative form with audited financial
statements for the current year should be clearly marked to indicate their status and

I.              The report on the prior period should be reissued to accompany the current period report.

II.            The report on the current period should include as a separate paragraph a description of the
responsibility assumed for the prior period's financial statements.

Ans D - Either I or II.

Corresponding Figures - Assessment

An auditor concludes that there is a material inconsistency in the other information in an annual report
to shareholders containing audited financial statements.  If the auditor concludes that the financial
statements do not require revision, but the client refuses to revise or eliminate the material
inconsistency, the auditor may

Ans D - Revise the auditor’s report to include a separate paragraph describing the material inconsistency

It exists when other information, not related to matters appearing in the audited financial statements, is
incorrectly stated or presented.

Ans B - Material misstatement of fact

They are not presented as complete financial statements capable of standing alone, but are an integral
part of the current period.

Ans A - Corresponding figures

This exists when other information contradicts information contained in the audited financial
statements.

Ans C - material inconsistency

If an amendment to other information in a document containing audited financial statements is

necessary and the entity refuses to make the amendment, the auditor would consider issuing:

Ans C - Unqualified opinion w/ explanatory paragraph

They are not presented as complete financial statements capable of standing alone, but are an integral
part of the current period financial statements intended to be read only in relationship to the current
period figures.

Ans A - Corresponding figures

When audited financial statements are presented in a client’s document containing other information,
the auditor should

Ans D - Read the other information to determine that it is consistent with the audited financial
statements.

It exists when other information, contradicts information in the audited financial statements

Ans B - Material misstatement of fact

The “other information” in a published report containing audited financial statements may be relevant
to an independent auditor’s examination.  With respect to “other information”

Ans A - The auditor’s responsibility does not extend beyond the financial information identified in the
report

An auditor concludes that there is a material inconsistency in the other information in an annual report
to shareholders containing audited financial statements. If the auditor concludes that the financial
statements do not require revision, but the client refuses to revise or eliminate the material
inconsistency, the auditor may

Ans A - Revise the auditor's report to include a separate explanatory paragraph describing the material
inconsistency.

Other Information Accompanying the Audited Financial Statements - Assessment

Other information that contradicts information contained in the audited financial statements is called

Ans A - Inconsistency

Per PSA 720: Financial and non-financial information (other than the financial statements and the
auditor’s report thereon) which is included, either by law, regulation or custom, in a document
containing audited financial statements and the auditor’s report thereon

Ans B - Other Information

S1.   The auditor’s opinion on financial statements normally covers the other information

S2.   The other information may undermine the credibility of the audited financial statements when
there are material inconsistencies

Ans C - False True

If an amendment to other information in a document containing audited financial statements is

necessary and the entity refuses to make the amendment, the auditor would consider issuing:

Ans C - Unqualified opinion with explanatory paragraph

Other information that is unrelated to matters appearing in the audited financial statements that is
incorrectly stated or presented is called
Ans B - Misstatement of fact

FS Prepared in Accordance with a Comprehensive Basis of Accounting Other Than GAAP - Assessment

An auditor’s special report on financial statements prepared in conformity with the basis of accounting
should include a separate explanatory paragraph before the opinion paragraph that

Ans C - Refers to the note to the financial statements that describes the basis of accounting.

PSA 800 “the auditor’s report on special purpose audit engagements” does not apply to a

Ans A - Audit of financial statements prepared in accordance with GAAP in the Philippines.

When reporting on financial statements prepared on the same basis of accounting used for income tax
purposes, the auditor should include in the report a paragraph that

Ans A - States the basis of accounting used

Other comprehensive basis of accounting may include all of the following except

Ans C - The accrual basis of accounting.

An auditor's report would be designated as a special report when it is issued in connection with financial
statements that are

Ans C - Prepared in accordance with a comprehensive basis of accounting other than generally accepted
accounting principles.

Specified Accounts, Elements of Accounts, or Items in a FS - Assessment

An auditor’s report on financial statements prepared on the cash receipts and disbursements basis of
accounting should include all of the following except

Choices:

a) A reference to the note to the financial statements that describes the cash receipts and
disbursements basis of accounting.
b) A statement that indicates the basis of accounting used 
c) An opinion as to whether the financial statements are presented fairly in conformity with the
cash receipts and disbursements basis of accounting.

Ans D - All of the above statements are correct

An auditor is engaged to report on selected financial data that are included in a client- prepared
document containing audited financial statements. Under these circumstances, the report on the
selected data should

Ans A - Be limited to data derived from the audited financial statements.

Which statement is correct regarding report on a component of financial statements?

Ans A - This type of engagement may be undertaken as a separate engagement or in conjunction with an
audit of the entity’s financial statements.

Compliance With Contractual Agreements - Assessment

Reports are considered special report when issued in connection with

Ans A - Compliance with aspects of regulatory requirements related to audited financial statements.

Reports are considered special reports when issued in connection with

Ans A - Compliance with aspects of regulatory requirements related to audited financial statements.

Engagements to express an opinion on the entity’s compliance with contractual agreements should be
undertaken only when
Ans A - the overall aspects of compliance relate to accounting and financial matters.

Which of the following types of audits may include in its audit opinion the following phrase –
“consistent, in all material respects”.

Ans C - Audit of summarized financial statement

Summarized Financial Statements - Assessment

Hardy, CPA, asked to express an opinion on Gold, Inc. summarized financial information. Hardy may
accept this engagement only if

Ans A - Hardy also audits Gold’s complete financial statements.

An auditor may report on condensed financial statements that are derived from complete financial
statements if the

Ans C - Auditor indicates whether the information in the condensed financial statements is fairly stated
in all material respects in relation to the complete financial statements from which it has been derived.

The auditor’s report on summarized financial statements should include

Ans B - An opinion as to whether the information in the summarized financial statements is consistent
with the audited financial statements from which it was derived.

Auditing in a CIS Environment

Characteristics of CIS - Assessment

A common difficulty in auditing a computerized accounting system is

Ans A - Data can be erased from the computer with no visible evidence.

Manual elements in internal control may be more suitable where judgment and discretion are required
such as for the following circumstances (choose the exception):

Ans D - High volume or recurring transactions

Which of the following is least likely to be considered by an auditor considering engagement of an

information technology (IT) specialist on an audit?

Ans B - Requirements to assess going concern status

 The characteristics that distinguish computer processing from manual processing include the following:

1)      Computer processing uniformly subjects like transactions to the same instructions.

2)      Computer systems always ensure that complete transaction trails useful for audit purposes are
preserved for indefinite purpose.

3)      Computer processing virtually eliminates the occurrence of clerical errors normally associated with
manual processing.

4)      Control procedures as to segregation of functions may no longer be necessary in computer

environment.

Ans C - Only statements 1 and 3 are true or B - Only statements (1) and (3) are true

A characteristic that distinguishes computer processing from manual processing is

Ans D - Computer processing virtually eliminates the occurrence of computational errors normally
associated with manual processing.

A common difficulty in auditing a computerized accounting system is:

Ans A - Data can be erased from the computer with no visible evidence.
Computer systems are typically supported by a variety of utility software packages that are important to
an auditor because they

Ans A - May enable unauthorized changes to data files if not properly controlled.

The use of a computer changes the processing, storage, and communication of financial information.  A
CIS environment may affect the following, except

Ans B - The overall objective and scope of an audit.

Which of the following is not an advantage of a computerized accounting system?

Ans D - Computers leave a thorough audit trail which can be easily followed

Which would largely change in an audit of a CIS environment?

Ans D - Specific methods in implementing the basic audit concepts

Which attribute below relates more to computer processing than manual processing?

Ans D - Similar transactions are uniformly subjected to similar instructions.

Which of the following statements most likely represents a disadvantage for an entity that maintains
data files on personal computers (PCs) rather than manually prepared files?

Ans D - It is usually easier for unauthorized persons to access and alter the files.

Which of the following activities would most likely be performed in the CIS department?

Ans B - Conversion of information to machine-readable form

Which of the following statements most likely represents a disadvantage for an entity that keeps
microcomputer-prepared data files rather than manually prepared files?

Ans D - It is usually easier for unauthorized persons to access and alter the files.

Internal Control in a CIS Environment - Assessment

Which of the following is an example of how specific controls in a database environment may differ from
controls in a non-database environment?

Ans A - Controls should exist to ensure that users have access to and can update only the data elements
that they have been authorized to access.

Which of the following passwords would be most difficult to crack?

Ans C - 12 HOUSE 24

To reduce security exposure when transmitting proprietary data over communication lines, a company
should use

Ans D - Cryptographic devices

Which of the following is a computer test made to ascertain whether a given characteristic belongs to
the group?

Ans B - Validity check

Able Co. uses an online sales order processing system to process its sales transactions. Able’s sales data
are electronically sorted and subjected to edit checks. A direct output of the edit checks most likely
would be a

Ans B - File of all rejected sales transactions

. Which of the following input controls describes a “self-checking digit”?

Ans D - Data need to be added with a mathematically calculated digit to detect transposition errors

A company using EDI (electronic data interchange) made it a practice to track the functional
acknowledgments from trading partners and to issue warning messages if acknowledgments did not
occur within a reasonable length of time. What risk was the company attempting to address by this
practice?

Ans B - Transmission of EDI transactions to trading partners may sometimes fail.

A widely used disaster recovery approach includes

Ans C – Regular backups

An entity installed antivirus software on all its personal computers.  The software was designed to
prevent initial infections, stop replication attempts, detect infections after their occurrence, mark
affected system components, and remove viruses from infected components.  The major risk in relying
on antivirus software is that it may

Ans C - Not detect certain viruses.

The internal auditor is reviewing a new policy on electronic mail. Appropriate elements of such a policy
would include all of the following except:

Ans A - Erasing all employee’s electronic mail immediately upon employment termination

Preventing someone with sufficient technical skill from circumventing security procedures and making
changes to production programs is best accomplished by

Ans D - Providing suitable segregation of duties

An entity should plan the physical location of its computer facility.  Which of the following is the primary
consideration for selecting a computer site?

Ans D - It should provide security.

The internal controls over computer processing include both manual procedures and procedures
designed into computer programs (programmed control procedures).  These manual and programmed
control procedures comprise the general CIS controls and CIS application controls.  The purpose of
general CIS controls is to

Ans B - Establish a framework of overall controls over the CIS activities and to provide a reasonable level
of assurance that the overall objectives of internal control are achieved.

To avoid invalid data input, a bank added an extra number at the end of each account number and
subjected the new number to an algorithm. This technique is known as

Ans B - A check digit

Computer program libraries can best be kept secure b

Ans B - Restricting physical and logical access

Internal control is ineffective when computer personnel

Ans C - Originate changes in master files

A “hot site” is most frequently associated with

Ans A – Disaster recovery

Client/server architecture may potentially involve a variety of hardware, systems software, and
application software from many vendors. The best way to protect a client/server system from
unauthorized access is through

Ans A - A combination of application and general access control techniques

.Which of the following controls most likely would assure that an entity can reconstruct its financial
records?

Ans B - Backup diskettes or tapes of files are stored away from originals.

Application controls do not include

Ans C - Controls for documenting and approving programs and changes to programs

Which function or activity is not performed in the user department?

Ans C - Conversion of data to machine-readable format

Management is concerned that data uploaded from a microcomputer to the company’s mainframe
system in batch processing may be erroneous. Which of the following controls would best address this
issue?

Ans C - The mainframe computer should subject the data to the same edits and validation routines that
online data entry would require.

Which of the following would not be an appropriate procedure for testing the general control activities
of an information system?

Ans C - Testing for the serial sequence of source documents.

A critical aspect of a disaster recovery plan is to be able to regain operational capability as soon as
possible. In order to accomplish this, an organization can have an arrangement with its computer
hardware vendor to have a fully operational facility available that is configured to the  user's specific
needs. This is best known as a (n) 

Ans D - Hot site

Choose the incorrect statement about General IT-controls?

Ans D - They are manual or automated procedures that typically operate at a business process level and
apply to the processing of transactions by individual applications.

End-user computing is most likely to occur on which of the following types of computers?

Ans C - Personal computers

Which of the following functions within the CIS department are incompatible?

Ans C - Data input and data conversion

When evaluating internal control of an entity that processes sales transactions on the Internet, an
auditor would be most concerned about the

Ans B - Potential for computer disruptions in recording sales

Which of the following presumptions is not correct?

Ans D - The specific methods appropriate for implementing the basic auditing concepts do not change,
as systems become more complex.

Which of the following is unique to CIS?

Ans A - Error listing

An auditor would most likely be concerned with which of the following controls in a distributed data
processing system?

Ans C - Access controls

. A company’s management is concerned about computer data eavesdropping and wants to maintain
the confidentiality of its information as it is transmitted. The company should utilize

Ans B - Data encryption

A well-prepared flowchart should make it easier for the auditor to

Ans C - Trace the origin and disposition of documents

Which of the following is correct concerning batch processing of transactions?

Ans C - It is more likely to result in an easy-to-follow audit trail than is on-line transaction processing.

Which of the following statements concerning the Internet is incorrect?

Ans B - The Internet is a private network that only allows access to authorized persons or entities.

If a control total were to be computed on each of the following data items, which would best be
identified as a hash total for a payroll CIS application?
Ans C - Department numbers

Where computers are used, the effectiveness of internal control depends, in part, upon whether the
organizational structure includes any incompatible functions.  Such a combination would exist when
there is no separation of duties between

Ans B - Programming and computer operator

General IT-controls do not include

Ans D - Controls on procedures used to initiate, record, process and report transactions or other
financial data

The auditor shall consider the entity’s CIS environment in designing audit procedures to reduce risk to
an acceptably low level.  Which of the following statements is incorrect?

Ans B - The methods of applying audit procedures to gather audit evidence are not influenced by the
methods of computer processing.

The management of ABC Co. suspects that someone is tampering with pay rates by entering changes
through the Co.’s

remote terminals located in the factory.  The method ABC Co. should implement to protect the system
from these unauthorized alterations to the system’s files is

Ans C – Passwords

In planning the portions of the audit which may be affected by the client’s CIS environment, the auditor
should obtain an understanding of the significance and complexity of the CIS activities and the
availability of data for use in the audit.  The following relate to the complexity of CIS activities
except when

Ans C - Material financial statement assertions are affected by the computer processing.

Totals of amounts in computer-record data fields, which are not usually added but are used only for
data processing control purposes are called

Ans B - Hash totals

In traditional information systems, computer operators are generally responsible for backing up
software and data files on a regular basis. In distributed or cooperative systems, ensuring that adequate
backups are taken is the responsibility of

Ans A - User management

An auditor anticipates assessing control risk at a low level in a CIS environment.  Under these
circumstances, on which of the following procedures would the auditor initially focus?

Ans D - General control procedures

Which of the following is a password security problem?

Ans D - Users are assigned passwords when accounts are created, but do not change them.

. End-user computing is an example of which of the following?

Ans D - Decentralized processing

A company often revises its production processes. The changes may entail revisions to processing
programs. Ensuring that changes have a minimal impact on processing and result in minimal risk to the
system is a function of

Ans B - Change control

The possibility of erasing a large amount of information stored on magnetic tape most likely would be
reduced by the use of

Ans A - File protection rings

In entering the billing address for a new client in Emil Company’s computerized database, a clerk
erroneously entered a non-existent zip code. As a result, the first month’s bill mailed to the new client
was returned to Emil Company.  Which one of the following would most likely have led to discovery of
the error at the time of entry into Emil Company’s computerized database?

Ans B - Validity test

Which of the following is an encryption feature that can be used to authenticate the originator of a
document and ensure that the message is intact and has not been tampered with?

Ans D - Digital signatures

Adequate control over access to data processing may help deter improper use or alteration of data files. 
The control can best be provided by

Ans A - User and terminal identification controls, such as passwords

Using microcomputers in auditing may affect the methods used to review the work of staff assistants
because

Ans D - Working paper documentation may not contain readily observable details of calculations.

.Which of the following statements is correct concerning internal control when a client is using an
electronic data interchange system for its sales?

Ans B - Encryption controls may help to assure that messages are unreadable to unauthorized persons.

Good planning will help an organization restore computer operations after a processing outage. Good
recovery planning should ensure that

Ans A - Backup/restart procedures have been built into job streams and programs.

Which of the following is not an example of an application control?

Ans A - An equipment failure causes an error message on the monitor.

Which of the following procedures would an entity most likely include in its computer disaster recovery
plan?

Ans B - Store duplicate copies of critical files in a location away from the computer center.

The completeness test of computer-generated sales figures can be tested by comparing the number of
items listed on the daily sales report with the number of items billed on the actual invoices.  This process
uses

Ans B - Control totals

To obtain evidence that online access controls are properly functioning, an auditor most likely would

Ans C - Enter invalid identification numbers or passwords to ascertain whether the system rejects them.

Computer personnel least likely

Ans C - Originate changes in master files

If an auditor is using test data in a client's computer system to test the integrity of the systems output,
which of the following types of controls is the auditor testing?

Ans D - Application controls

Mill Co. uses a batch processing method to process its sales transactions. Data on Mill’s sales transaction
tape are electronically sorted by customer number and are subjected to programmed edit checks in
preparing its invoices, sales journals, and updated customer account balances. One of the direct outputs
of the creation of this tape most likely would be a

Ans A - Report showing exceptions and control totals

Matthews Corp. has changed from a system of recording time worked on clock cards to a computerized
payroll system in which employees record time in and out with magnetic cards. The computer system
automatically updates all payroll records. Because of this change
Ans B - Part of the audit trail is altered.

An auditor would be most likely to assess control risk at the maximum level in an electronic
environment with automated system-generated information when

Ans C - Fixed asset transactions are few in number, but large in peso amount.

A customer intended to order 100 units of product Z96014, but incorrectly ordered non-existent product
Z96015. Which of the following controls most likely would detect this error?

Ans A - Check digit verification

A clerk inadvertently entered an account number 12368 rather than account number 12638.  In
processing this transaction, the errors would be detected with which of the following controls?

Ans C - Self-checking digit

Which of the following is an example of a validity check?

Ans C - The computer flags any transmission for which the control field value did not match that of an
existing file record.

After the preliminary phase of the review of a client’s computer controls, an auditor may decide not to
perform tests of controls (compliance tests) related to the controls within the computer portion of the
client’s internal control. Which of the following would not be a valid reason for choosing to omit such
tests?

Ans D - The controls appear adequate.

 Which of the following is a risk that is higher when an electronic funds transfer (EFT) system is used?

Ans B - Unauthorized access and activity

Where disk files are used, the grandfather-father-son updating backup concept is relatively difficult to
implement because the

Ans D - Process of updating old records is destructive.

ABC Co. updates its accounts receivable master file weekly and retains the master files and
corresponding update transactions for the most recent 2-week period.  The purpose of this practice is to

Ans C - Permit reconstruction of the master file if needed

An entity has recently converted its purchasing cycle from a manual process to an online computer
system.  Which of the following is a probable result associated with conversion to the new IT system?

Ans A - Traditional duties are less separated.

A manufacturer is considering using bar-code identification for recording information on parts used by
the manufacturer. A reason to use bar codes rather than other means of identification is to ensure that

Ans B - The movement of parts is easily and quickly recorded.

A company is concerned that a power outage or disaster could impair the computer hardware’s ability
to function as designed. The company desires off-site backup hardware facilities that are fully configured
and ready to operate within several hours.

       The company most likely should consider a

Ans D - Hot site

Which of the following is correct about check digits?

Ans D - They are designed to detect transcription errors.

One major category of computer viruses is programs that attach themselves to other programs, thus
infecting the other programs. While many of these viruses are relatively harmless, some have the
potential to cause significant damage. Which of the following is an indication that a computer virus of
this category is present?
Ans B - Unexplainable losses of or changes to data

Which of the following statements is correct concerning the security of messages in an electronic data
interchange (EDI) system?

Ans B - Encryption performed by physically secure hardware devices is more secure than encryption
performed by software.

Auditing Around the Computer - Assessment

Smith Corporation has numerous customers. A customer file is kept on disk storage. Each customer file
contains name, address, credit limit, and account balance. The auditor wishes to test this file to
determine whether credit limits are being exceeded. The best procedure for the auditor to follow would
be to

Ans B - Develop a program to compare credit limits with account balances and print out the details of
any account with a balance exceeding its credit limit.

A primary reason auditors are reluctant to use an ITF is that it requires them to

Ans D - Identify and reserve the fictitious entries to avoid contamination of master file

An auditor is least likely to find that a client’s data is input through

Ans B - Dynamic linking character reader

Which of the following is an incorrect statement regarding testing strategies related to auditing through
the computer?

Ans A - The test data approach involves processing the client's data on a test basis to determine the
integrity of the system.

An auditor who wishes to capture an entity’s data as transactions are processed and continuously test
the entity’s computerized information system most likely would use which of the following techniques?

Ans B - Embedded audit module

Which is most likely correct about “whitebox audit” or “auditing through the computer”?

Ans D - The focus is more on the processing rather than the input and output components of the system.

In auditing through a computer, the test data method is used by the auditors to test the

Ans C - Procedures contained within the program

PAPS 1009 (Computer-Assisted Audit Techniques) states, “Customized or purpose-written programs

perform audit tasks in specific circumstances where package audit software is deemed unsuitable
usually because system constraints make it difficult or impossible to use.” A purpose-written program
may be developed by

1)   The auditor

2)   The entity being audited

3)   An outside programmer hired by the auditor

Ans B - 1)   Yes       2)   Yes       3)   Yes

It involves application of auditing procedures using the computer as an audit tool.  This includes
computer programs and data the auditor uses as part of the audit procedures to process data of audit
significance contained in an entity’s information systems.

Ans B - Computer-assisted audit techniques

Auditors often make use of computer programs that perform routine processing functions such as
sorting and merging. These programs are made available by electronic data processing companies and
others and are specifically referred to as

Ans C - Utility programs

The employee entered “40” in the “hours worked per day” field.  Which check would detect this
unintentional error?

Ans C – Limit Check

Auditing Around the Computer - Assessment

An ITF would be appropriate when the auditor needs to

Ans B - Verify processing accuracy concurrently with processing

Which of the following methods of testing application controls utilizes a generalized audit software
package prepared by the auditors?

Ans A - Parallel simulation

Parallel simulation is an audit technique employed to verify processing logic by making use of audit test
programs. These audit test programs "simulate" the processing logic of an application program or
programs under review. Which statement indicates the use of parallel simulation audit technique?

Ans D - Live transactions are processed using test programs.

Which of the following is an example of auditing “around” the computer?

Ans A - The auditor traces adding machine tapes of sales order batch totals to a computer printout of
the sales journal.

Output controls ensure that the results of computer processing are accurate, complete, and properly
distributed. Which of the following is not a typical output control?

Ans B - Matching input data with information on master files and placing unmatched items in a suspense
file

An auditor estimates that 10,000 checks were issued during the accounting period.  If a computer
application control which performs a limit check for each request is to be subjected to the auditor’s test
data approach, the sample should include

Ans D - One transaction

The following are benefits of using IT-based controls, except

Ans B - Over-reliance on computer-generated reports.

In a highly automated information processing system tests of control

Ans C - May be required in some circumstances

Which of the following computer-assisted auditing techniques allows fictitious and real transactions to
be processed together without client operating personnel being aware of the testing process?

Ans B - Integrated test facility approach

When an auditor tests a computerized accounting system, which of the following is true of the test data
approach?

Ans B - Test data are processed by the client’s computer programs under the auditor’s control.

Which of the following statement is not true about test data?

Ans C - Test data must consist of all possible valid and invalid conditions.

A retail entity uses electronic data interchange (EDI) in executing and recording most of its purchase
transactions. The entity’s auditor recognized that the documentation of the transactions will be retained
for only a short period of time. To compensate for this limitation, the auditor most likely would
Ans B - Perform tests several times during the year, rather than only at year-end.

Auditing by testing the input and output of a computer system instead of the computer program itself
will

Ans A - Not detect program errors which do not show up in the output sampled

Which of the following does not support the “test data” approach?

Ans D - It allows fictitious and real transactions to be processed together without the client operating
personnel being aware of the testing process.

Which of the following computer-assisted auditing techniques processes client input data on a
controlled program under the auditor’s control to test controls in the computer system?

Ans D - Parallel simulation

Which of the following strategies would a CPA most likely consider in auditing an entity
that processes most of its financial data only in electronic form, such as a paperless system?

Ans A - Continuous monitoring and analysis of transaction processing with an embedded audit module

Which of the following combinations is correct?

1)   Integrated test facility

2)   Test data

3)   Paralel simulation

Ans D - (1) Test data, live program;     (2) Test data, live program;     (3) Live data, test program

An auditor most likely would introduce test data into a computerized payroll system to test controls
related to the

Ans C - Discovery of invalid employee I.D. numbers

Which of the following is not among the errors that an auditor might include in the test data when
auditing a client’s computer system?

Ans A - Numeric characters in alphanumeric fields

Parallel simulation is an audit technique employed to verify processing by making use of audit test
programs.  These audit test programs “simulate” the processing logic of an application program or
progress under review.  Which statement indicates the use of parallel simulation?

Ans D – Live transactions are processed using test programs

Auditing Through the Computer (CAATS) - Assessment

A primary reason auditors are reluctant to use an ITF is that it requires them to

Ans D - Identify and reserve the fictitious entries to avoid contamination of master file

In auditing through a computer, the test data method is used by the auditors to test the

Ans C - Procedures contained within the program

Auditors often make use of computer programs that perform routine processing functions such as
sorting and merging. These programs are made available by electronic data processing companies and
others and are specifically referred to as

Ans C - Utility programs

PAPS 1009 (Computer-Assisted Audit Techniques) states, “Customized or purpose-written programs

perform audit tasks in specific circumstances where package audit software is deemed unsuitable
usually because system constraints make it difficult or impossible to use.” A purpose-written program
may be developed by

 
1)   The auditor

2)   The entity being audited

3)   An outside programmer hired by the auditor

Ans B - 1)   Yes       2)   Yes       3)   Yes

Which is most likely correct about “whitebox audit” or “auditing through the computer”?

Ans D - The focus is more on the processing rather than the input and output components of the system.

Which of the following is an incorrect statement regarding testing strategies related to auditing through
the computer?

Ans A - The test data approach involves processing the client's data on a test basis to determine the
integrity of the system.

An auditor who wishes to capture an entity’s data as transactions are processed and continuously test
the entity’s computerized information system most likely would use which of the following techniques?

Ans B - Embedded audit module

Smith Corporation has numerous customers. A customer file is kept on disk storage. Each customer file
contains name, address, credit limit, and account balance. The auditor wishes to test this file to
determine whether credit limits are being exceeded. The best procedure for the auditor to follow would
be to

Ans B - Develop a program to compare credit limits with account balances and print out the details of
any account with a balance exceeding its credit limit.

It involves application of auditing procedures using the computer as an audit tool.  This includes
computer programs and data the auditor uses as part of the audit procedures to process data of audit
significance contained in an entity’s information systems.

Ans B - Computer-assisted audit techniques

An auditor is least likely to find that a client’s data is input through

Ans B - Dynamic linking character reader

Review, Assurance and Non-Assurance Services

Compilation of FS - Assessment

Philippine Standards on Related Services establish standards and procedures for which of the following
engagements?

Ans D - Compiling an individual’s personal financial statement to be used to obtain a mortgage.

What level of assurance does an accountant give on a compilation report?

Ans A - None

Which of the following procedures is ordinarily performed by an accountant in a compilation

engagement of a nonpublic entity?

Ans A - Reading the financial statements to consider whether they are free of obvious mistakes in the
application of accounting principles.

During a compilation of a non-public entity's financial statements, an accountant would be least likely
to? 

Ans C - Perform analytical procedures designed to identify relationships that appear to be unusual

In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to

auditing expertise to collect, classify, and summarize financial information.  What type of assurance is
provided by the accountant when he/she performs this engagement?
Ans C - No assurance

Prior to commencing the compilation of financial statements of an entity, the accountant should?

Ans D - Acquire knowledge of any specialized accounting principles and practices used in the entity’s
industry.

Which of the following procedures would an accountant most likely perform in a compilation
engagement?

Ans A - Collect, classify and summarize  financial information

Main standards to govern compilation engagements

Ans C - PSRSs

Which of the following procedures does an auditor in a compilation engagement of a non-public entity
ordinarily perform?

Ans A - Reading the financial statements to consider whether they are free of obvious mistakes in
application of accounting principles.

The statement that nothing came to our attention which would indicate that these statements are not
fairly presented expresses which of the following?

Ans B - negative assurance

An accountant’s compilation report should be dated as of the date of?

Ans B - Completion of the compilation

Objective of a compilation engagement (PSRSs)

Ans D - For the auditor to use accounting expertise, as opposed to auditing expertise, to collect, classify
and summarize financial information

A professional CPA’s compilation report should be dated as of the date of

Ans B - Completion of the compilation

Which of the following should not be included in an accountant’s report based upon the compilation of
an entity’s financial statements?

Ans D - A statement that the accountant does not express an opinion but provides only negative
assurance on the statements.

Which of the following is not a distinction between a compilation and a review?

Ans B - In conducting a review, the CPA must obtain an understanding of the client's internal control
system; but this is not necessary for a compilation engagement

A CPA who is not independent may issue a?

Ans D - Compilation report

Each page (or front page) of the financial information compiled by the accountant should include the
following reference, except

Ans A - Limited Assurance Provided”

When a professional CPA is not independent of a client and is requested  to perform a compilation of its
financial statements, the professional CPA

Ans C - May accept the engagement and should disclose the lack of independence, but not the reason  
for the lack of independence

During the course of an audit of financial statements, the client informs the professional CPA that he
may not correspond with the client’s legal counsel.  Under these circumstances, the professional CPA

Ans C - Should ordinarily refuse to issue either a review of compilation report

In which of the following reports should an accountant not express negative or limited assurance?
Ans B - A standard compilation report on financial statements of a nonpublic entity

Which of the following statement is not true about the reports provided by a CPA?

Ans D - In a compilation engagement, no assurance is expressed and the users of financial information
do not derive any benefit from the CPA’s involvement

Incorrect regarding compilation engagement

Ans C - Inquiries of management should be made to assess the reliability and completeness of the
information provided

Which of the following services, if any, may a practitioner who is not independent provide?

Ans A - Compilations but not reviews.

When compiled financial statements are accompanied by an accountant’s report, that report should
state that?

Ans B - The accountant compiled the financial statements in accordance with PSRSs

When performing a compilation engagement, the accountant is required to

Ans D - Obtain a general knowledge of the business and operations of the entity.

Which of the following procedures does an accountant in a compilation engagement of a nonpublic

entity ordinarily perform?

Ans A - Reading the financial statements to consider whether they are free of obvious mistakes in the
application of accounting principles

Ethical principles governing compilation of financial statements include

1)      Independence

2)      Competence

3)      Professional behaviors

 Ans D - 1)   No       2)   Yes       3)   Yes

Compilations can be performed for

Public companies Non-public companies

Ans D -

Yes No

Which of the following statements is correct concerning both an engagement to compile and an
engagement to review a nonpublic entity’s financial statements?

Ans A - The accountant does not contemplate obtaining an understanding of internal control.

When compiling an entity’s financial statements, an accountant would be least likely to

Ans A - Perform analytical procedures designed to identify relationships that appear to be unusual.

Level of assurance in a compilation engagement

Ans D - None

Which of the following is not a primary category of attestation report?

Ans A - Compilation report

Which of the following representations does an accountant make implicitly when issuing the standard
report for the compilation of a nonpublic entity’s financial statements?

Ans A - The accountant is independent with respect to the entity

Which of the following is incorrect about a compilation engagement?

Ans A - The CPA uses his auditing expertise to collect, classify and summarize financial information

When the CPA is not independent with respect to a compilation client, the CPA must

Ans B - Include a separate paragraph in the report stating the lack of independence.

When compiling the financial statements of an entity, an accountant should

Ans B - Understand the accounting principles and practices of the entity’s industry.

Agreed-Upon Procedures - Assessment

Engagement to apply agreed-upon procedures on certain accounts within a financial statement may be
accepted provided

Ans D - The distribution of the report is limited only to specified parties involved

A CPA's report on agreed-upon procedures related to management's assertion about an entity's

compliance with specified requirements should contain:

Ans A - A statement of limitations on the use of the report

Level of assurance in an AUP engagement

Ans D - None

Matters to be agreed in agreed in an agreed- upon  procedures engagement include the following,
except:

Ans C - Anticipated form of the report and the level of assurance to be provided.

Independence is not a requirement for which of the following engagements?

1)   Compilation

2)   Review

3)   Agreed-upon Procedures

Ans C - 1)   Yes       2)   No       3)   Yes

The objective of an agreed upon-procedures engagement is for the auditor to:

Ans A - Carry out procedures of an audit nature to which the auditor and the entity and any appropriate
third parties have agreed and to report on factual findings

A report on factual findings is the end product of the auditor when performing

Ans D - Agreed-upon procedures

A CPA's report on agreed-upon procedures related to management's assertion about an entity's

compliance with specified requirements should contain:

Ans A - A statement of limitations on the use of the report

Matters to be agreed in an agreed-upon procedures engagement include the following, except:

Ans C - Anticipated form of the report and the level of assurance to be provided

What level of assurance does an auditor provide an engagement to perform agreed-upon procedures?

Ans D - No assurance

Main standards to govern agreed-upon procedures engagements

Ans C - PSRSs

A CPAs report on agreed-upon procedures related to management’s assertion about an entity’s

compliance with specified requirements should contain:

Ans A - A statement of limitations on the use of the report

Objective of an AUP engagement (PSRSs)

Ans A - For the auditor to carry out procedures of an audit nature to which the auditor and the entity
and any appropriate third parties have agreed and to report on factual findings

An accountant may accept an engagement to apply agreed-upon procedures that are not sufficient to
express an opinion on one or more specified accounts or items of a financial statement provided that

Ans C - Distribution of the accountant’s report is restricted.

An accountant may accept an engagement to apply agreed-upon procedures to prospective financial

statements provided that

Ans A - Use of the report is restricted to the specified parties

AUP engagements are normally found in what type of audit

Ans D - Fraud

Incorrect regarding an AUP engagement

Ans D - Professional competence, due care and independence are required in the execution of the
procedures

A CPA may accept an engagement to apply agreed-upon procedures on specified element of

financial statements provided

Ans D - The client takes full responsibility for the procedures to be performed

Which of the following is incorrect about agreed- upon procedures engagement?

Ans C - The auditor should be independent of the financial data or financial statement where agreed
procedures have to be applied.

Which of the following ethical principles does not apply to an agreed-upon procedure engagement?

Ans A - Independence

The objective of an agreed upon- procedures engagement is for the auditor to.

Ans A - Carry out procedures of an audit nature to which the auditor and the entity and any appropriate
third parties have agrees and to report on factual findings.

Which of the following is incorrect about agreed-upon procedures engagement?

Ans C - The auditor should be independent of the financial data or financial statements where agreed
procedures have to be applied

Performing Substantive Tests Of Transactions And Balances

Audit of sales and revenue transactions - Assessment

Which of the following procedures would ordinarily be expected to best reveal unrecorded sales at the
balance sheet date

Ans A - Compare shipping documents with sales records.

Which of the following controls most likely would help ensure that all credit sales transactions of an
entity are recorded?

Ans D - The billing department supervisor matches prenumbered shipping documents with entries in the
sales journal.

Audit of recevable balances - Assessment

It is sometimes impracticable or impossible for an auditor to use normal accounts receivable
confirmation procedures.  In such situations, the best alternative procedure the auditor might resort to
would be

Ans A - Examining subsequent receipts of year-end accounts receivable.

Returns of positive confirmation requests for accounts receivable were very poor.  As an alternative
procedure, the auditor decided to check subsequent collections.  The auditor had satisfied himself that
the client satisfactorily listed the customer name next to each check listed on the deposit slip; hence, he
decided that for each customer for which a confirmation was not received that he would add all
amounts shown for that customer on each validated deposit slip for the two months following the
balance-sheet date. The major fallacy in the auditor’s procedures is that

Ans B - By looking only at the deposit slip the auditor would not know if the payment was for the
receivable at the balance sheet date or a subsequent transaction.

In connection with your examination of the financial statements of Tenacity Corporation for the year
ended December 31, 2013, you were able to obtain certain information during your audit of the
accounts receivable and related accounts.

The December 31, 2013 balance of the Accounts Receivable control account is P1,576,000.

The only entries in the Doubtful Accounts Expense account were:

·         A credit of P2,592 on December 2, 2013 because Company A remitted in full for the accounts
charged off on October 31, 2013; and

·         A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is presented below:

                                                Debit                      Credit                     Balance

January 1, 2013                                                                                   P29,264

October 31, 2013

     Accounts written-off:

                Co. A – P2,592

                Co. B – P6,560

                Co. C – P4,512      P12,064                                                   17,200

December 31, 2013                                             P78,800                 P96,000

An aging schedule of the accounts receivable as of December 31, 2013 is presented below:

                                                                  Amount to which the allowance

                                                                is to be adjusted after adjustments

Age          Net debit balance                and corrections have been made

0 to 1 month         P745,920               1 percent

1 to 3 months         614,560                2 percent

3 to 6 months         177,440                3 percent

Over 6 months         48,000       Definitely uncollectible, P8,000;

                                                       P16,000 is considered uncollectible;

                                                       The remainder is estimated to be

                                                       80% collectible

There is a credit balance in one account receivable (0 to 1 month) of P16,000; it represents an advance
on a sales contract. Also, there is a credit balance in one of the 1 to 3 months account receivable of
P4,000 for which merchandise will be accepted by the customer.

The ledger accounts have not been closed as of December 31, 2013. The Accounts Receivable control
account is not in agreement with the subsidiary ledger. The difference cannot be located, and you
decided to adjust the control account to the sum of the subsidiaries after corrections are made.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

How much is the adjusted balance of Accounts Receivable as of December 31, 2013?

Ans C - P1,597,920

When there is a large number of relatively small account balances, negative confirmation of accounts
receivable is feasible if internal accounting control is

Ans C - Strong, and the individuals receiving the confirmation requests are likely to give them adequate
consideration.

In connection with your examination of the financial statements of Tenacity Corporation for the year
ended December 31, 2013, you were able to obtain certain information during your audit of the
accounts receivable and related accounts.

The December 31, 2013 balance of the Accounts Receivable control account is P1,576,000.

The only entries in the Doubtful Accounts Expense account were:

·         A credit of P2,592 on December 2, 2013 because Company A remitted in full for the accounts
charged off on October 31, 2013; and

·         A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is presented below:

                                                Debit                      Credit                     Balance

January 1, 2013                                                                                   P29,264

October 31, 2013

     Accounts written-off:

                Co. A – P2,592

                Co. B – P6,560

                Co. C – P4,512      P12,064                                                   17,200

December 31, 2013                                             P78,800                 P96,000

An aging schedule of the accounts receivable as of December 31, 2013 is presented below:
 

                                                                  Amount to which the allowance

                                                                is to be adjusted after adjustments

Age          Net debit balance               and corrections have been made

0 to 1 month         P745,920               1 percent

1 to 3 months         614,560                2 percent

3 to 6 months         177,440                3 percent

Over 6 months         48,000        Definitely uncollectible, P8,000;

                                                        P16,000 is considered uncollectible;

                                                        The remainder is estimated to be

                                                        80% collectible

There is a credit balance in one account receivable (0 to 1 month) of P16,000; it represents an advance
on a sales contract. Also, there is a credit balance in one of the 1 to 3 months account receivable of
P4,000 for which merchandise will be accepted by the customer.

The ledger accounts have not been closed as of December 31, 2013. The Accounts Receivable control
account is not in agreement with the subsidiary ledger. The difference cannot be located, and you
decided to adjust the control account to the sum of the subsidiaries after corrections are made.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2013?

Ans B - P38,113

Which of the following statements is correct concerning the use of negative confirmation requests?

Ans D - Negative confirmation requests are effective when understatements of account balances are
suspected.

An aged trial balance of accounts receivable is usually used by the auditor to

Ans D - Evaluate the provision for bad debts expense

In which of the following circumstances would the use of negative form of accounts receivable
confirmation most likely be justified?

Ans D - A small number of accounts may be in dispute and the accounts receivable balance arises from
sales to many customers with small balances. 

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts
receivable because

Ans C - The auditor cannot infer that all nonrespondents have verified their account information

Which of the following procedures would an auditor most likely perform for year-end accounts
receivable confirmation when the auditor did not receive replies to second requests?

Ans D - Inspect the shipping records documenting the merchandise sold to debtors.
In connection with your examination of the financial statements of Tenacity Corporation for the year
ended December 31, 2013, you were able to obtain certain information during your audit of the
accounts receivable and related accounts.

The December 31, 2013 balance of the Accounts Receivable control account is P1,576,000.

The only entries in the Doubtful Accounts Expense account were:

·         A credit of P2,592 on December 2, 2013 because Company A remitted in full for the accounts
charged off on October 31, 2013; and

·         A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is presented below:

                                                Debit                      Credit                     Balance

January 1, 2013                                                                                   P29,264

October 31, 2013

     Accounts written-off:

                Co. A – P2,592

                Co. B – P6,560

                Co. C – P4,512      P12,064                                                   17,200

December 31, 2013                                             P78,800                 P96,000

An aging schedule of the accounts receivable as of December 31, 2013 is presented below:

                                                                  Amount to which the allowance

                                                                is to be adjusted after adjustments

Age          Net debit balance                and corrections have been made

0 to 1 month         P745,920               1 percent

1 to 3 months         614,560                2 percent

3 to 6 months         177,440                3 percent

Over 6 months         48,000       Definitely uncollectible, P8,000;

                                                       P16,000 is considered uncollectible;

                                                       The remainder is estimated to be

                                                       80% collectible

There is a credit balance in one account receivable (0 to 1 month) of P16,000; it represents an advance
on a sales contract. Also, there is a credit balance in one of the 1 to 3 months account receivable of
P4,000 for which merchandise will be accepted by the customer.

The ledger accounts have not been closed as of December 31, 2013. The Accounts Receivable control
account is not in agreement with the subsidiary ledger. The difference cannot be located, and you
decided to adjust the control account to the sum of the subsidiaries after corrections are made.
 

QUESTIONS:

Based on the above and the result of your audit, answer the following:

How much is the net adjustment to the Doubtful Accounts expense account?

Ans C - P48,287 credit

Confirmation is the process of obtaining and evaluating a direct communication from a third party in
response to a request for information about a particular item affecting financial statement assertions.
Two assertions from which confirmation of accounts receivable balances provides primary evidence are

Ans C - Rights and obligations and existence.

One of the major audit procedures for determining whether the allowance for doubtful receivables is
adequate is

Ans A - The preparation of a list of aged accounts receivable.

Expenditure cycle - Assessment

It is an internal document sent by the department in need of the supplies to the purchasing department.

Ans A - Purchase requisition

Which of the following policies is an internal control weakness related to the acquisition of factory
equipment?

Ans D - Acquisitions are to be made through and approved by the department in need of the equipment.

Proper authorization for acquisition is essential because it

Ans C - Ensures that goods/services are for authorized company purposes

Audit of acquisitions and purchases - Assessment

In your audit of the December 31, 2012, financial statements of CHICKEN, INC., you found the following
inventory-related transactions.

A.      Goods costing P50,000 are on consignment with a customer. These goods were not included in the
physical count on December 31, 2012.

B.      Goods costing P16,500 were delivered to Chicken, Inc. on January 4, 2013. The invoice for these
goods was received and recorded on January 10, 2013. The invoice showed the shipment was made on
December 29, 2012, FOB shipping point.

C.      Goods costing P21,640 were shipped FOB shipping point on December 31, 2012, and were received
by the customer on January 2, 2013.Although the sale was recorded in 2012, these goods were included
in 2012 ending inventory.

D.      Goods costing P8,640 were shipped to a customer on December 31, 2012, FOB destination. These
goods were delivered to the customer on January 5, 2013, and were not included in the inventory. The
sale was properly taken up in 2013.

 
E.       Goods costing P8,600 shipped by a vendor under FOB destination term, were received on January
3, 2013, and thus were not  included in the physical inventory. Because the related invoice was received
on December 31, 2012, this shipment was recorded as a purchase in 2012.

F.       Goods valued at P51,000 were received from a vendor under consignment term. These goods
were included in the physical count.

G.      Chicken, Inc. recorded as a 2012 sale a P64,300 shipments of goods to a customer on December
31, 2012, FOB destination. This shipment of goods costing P37,500 was received by the customer on
January 5, 2013, and was not included in the ending inventory figure.

Prior to any adjustments, Chicken, Inc.’s ending inventory is valued at P445,000 and the reported net
income for the year is P1,648,000.

Purchase cut-off procedures test the cut-off and completeness assertions. A company should include
goods in its inventory if it

Ans C - Has physical possession of the goods.

In your audit of the December 31, 2012, financial statements of CHICKEN, INC., you found the following
inventory-related transactions.

A.      Goods costing P50,000 are on consignment with a customer. These goods were not included in the
physical count on December 31, 2012.

B.      Goods costing P16,500 were delivered to Chicken, Inc. on January 4, 2013. The invoice for these
goods was received and recorded on January 10, 2013. The invoice showed the shipment was made on
December 29, 2012, FOB shipping point.

C.      Goods costing P21,640 were shipped FOB shipping point on December 31, 2012, and were received
by the customer on January 2, 2013.Although the sale was recorded in 2012, these goods were included
in 2012 ending inventory.

D.      Goods costing P8,640 were shipped to a customer on December 31, 2012, FOB destination. These
goods were delivered to the customer on January 5, 2013, and were not included in the inventory. The
sale was properly taken up in 2013.

E.       Goods costing P8,600 shipped by a vendor under FOB destination term, were received on January
3, 2013, and thus were not  included in the physical inventory. Because the related invoice was received
on December 31, 2012, this shipment was recorded as a purchase in 2012.

F.       Goods valued at P51,000 were received from a vendor under consignment term. These goods
were included in the physical count.

G.      Chicken, Inc. recorded as a 2012 sale a P64,300 shipments of goods to a customer on December
31, 2012, FOB destination. This shipment of goods costing P37,500 was received by the customer on
January 5, 2013, and was not included in the ending inventory figure.
Prior to any adjustments, Chicken, Inc.’s ending inventory is valued at P445,000 and the reported net
income for the year is P1,648,000.

Chicken’s December 31, 2012, inventory should be increased by 

Ans B - P40,000

Audit of payroll transactions - Assessment

Bagtit Company has 35 employees who work 8-hour days and are paid hourly.  On January 1, 2012, the
company began a program of granting its employees 10 days paid vacation each year.  Vacation days
earned in 2012 may first be taken on January 1, 2013.  Information relative to these employees is as
follows:

Year Hourly Vacation Days Vacation Days Used

Wages Earned by Each by Each Employee
Employee

2012 P12.90 10  0

2013  13.50 10  8

2014  14.25 10 10

Bagtit has chosen to accrue the liability for compensated absences at the current rates of pay in effect
when the compensated time is earned.

What is the amount of expense relative to compensated absences that should be reported on Bagtit’s
income statement for 2012?

Ans D - P36,120

Bagtit Company has 35 employees who work 8-hour days and are paid hourly.  On January 1, 2012, the
company began a program of granting its employees 10 days paid vacation each year.  Vacation days
earned in 2012 may first be taken on January 1, 2013.  Information relative to these employees is as
follows:

Year Hourly Vacation Days Vacation Days Used

Wages Earned by Each by Each Employee
Employee

2012 P12.90 10  0

2013  13.50 10  8

2014  14.25 10 10

Bagtit has chosen to accrue the liability for compensated absences at the current rates of pay in effect
when the compensated time is earned.

 
What is the amount of the accrued liability for compensated absences that should be reported at
December 31, 2014?

Ans A - P47,460

Audit of inventory balances - service and merchandising - Assessment

In conducting your audit of V-Power Corporation, a company engaged in import and wholesale business,
for the fiscal year ended June 30, 2011, you determined that its internal control system was good.
Accordingly, you observed the physical inventory at an interim date, May 31, 2011 instead of at June 30,
2011.

You obtained the following information from the company’s general ledger.

Sales for eleven months ended May 31, 2011 P1,344,000

Sales for the fiscal year ended June 30, 2011   1,536,000

Purchases for eleven months ended May 31, 2011  

          (before audit adjustments)   1,080,000

Purchases for the fiscal year ended June 30, 2011   1,280,000

Inventory, July 1, 2010      140,000

Physical inventory, May 31, 2011      220,000

Your audit disclosed the following additional information.

·         Shipments costing P12,000 were received in May and included in the physical inventory but
recorded as June purchases.

·         Deposit of P4,000 made with vendor and charged to purchases in April 2011. Product was shipped
in July 2011.

·         A shipment in June was damaged through the careless of the receiving department. This shipment
was later sold in June at its cost of              P16,000.

In audit engagements in which interim physical inventories are observed, a frequently used auditing
procedure is to test the reasonableness of the year-end inventory by the application of gross profit ratio.
Based on the above and the result of your audit, you are to provide the answers to the following:

The gross profit ratio for eleven months ended May 31, 2011 is

Ans D – 25%

In conducting your audit of V-Power Corporation, a company engaged in import and wholesale business,
for the fiscal year ended June 30, 2011, you determined that its internal control system was good.
Accordingly, you observed the physical inventory at an interim date, May 31, 2011 instead of at June 30,
2011.

 
You obtained the following information from the company’s general ledger.

Sales for eleven months ended May 31, 2011 P1,344,000

Sales for the fiscal year ended June 30, 2011   1,536,000

Purchases for eleven months ended May 31, 2011  

          (before audit adjustments)   1,080,000

Purchases for the fiscal year ended June 30, 2011   1,280,000

Inventory, July 1, 2010      140,000

Physical inventory, May 31, 2011      220,000

Your audit disclosed the following additional information.

·         Shipments costing P12,000 were received in May and included in the physical inventory but
recorded as June purchases.

·         Deposit of P4,000 made with vendor and charged to purchases in April 2011. Product was shipped
in July 2011.

·         A shipment in June was damaged through the careless of the receiving department. This shipment
was later sold in June at its cost of P16,000.

QUESTIONS:

In audit engagements in which interim physical inventories are observed, a frequently used auditing
procedure is to test the reasonableness of the year-end inventory by the application of gross profit ratio.
Based on the above and the result of your audit, you are to provide the answers to the following:

The cost of goods sold during the month of June, 2011 using the gross profit ratio method is

Ans C - P148,000

In conducting your audit of V-Power Corporation, a company engaged in import and wholesale business,
for the fiscal year ended June 30, 2011, you determined that its internal control system was good.
Accordingly, you observed the physical inventory at an interim date, May 31, 2011 instead of at June 30,
2011.

You obtained the following information from the company’s general ledger.

Sales for eleven months ended May 31, 2011 P1,344,000

Sales for the fiscal year ended June 30, 2011   1,536,000

Purchases for eleven months ended May 31, 2011  

          (before audit adjustments)   1,080,000

Purchases for the fiscal year ended June 30, 2011   1,280,000

Inventory, July 1, 2010      140,000

 Physical inventory, May 31, 2011      220,000

Your audit disclosed the following additional information.

·         Shipments costing P12,000 were received in May and included in the physical inventory but
recorded as June purchases.

·         Deposit of P4,000 made with vendor and charged to purchases in April 2011. Product was shipped
in July 2011.

·         A shipment in June was damaged through the careless of the receiving department. This shipment
was later sold in June at its cost of             P16,000.

In audit engagements in which interim physical inventories are observed, a frequently used auditing
procedure is to test the reasonableness of the year-end inventory by the application of gross profit ratio.
Based on the above and the result of your audit, you are to provide the answers to the following:

The June 30, 2011 inventory using the gross profit method is

Ans D - P260,000

Audit of trade payable balances and accrued liabilities - Assessment

A court case decided on 21 December 2011 awarded damages against San Gin. The judge has
announced that the amount of damages will be set at a future date, expected to be in March 2012. San
Gin has received advice from its lawyers that the amount of the damages could be anything between
P20,000 and P7,000,000. As of December 31, 2011, how much should be recognized in the statement of
financial position regarding this court case?

Ans D - P                0

Beginning 2011, San Gin began marketing a new beer called “Blue Colt”. To help promote the product,
the management is offering a special beer mug to each customer for every 20 specially marked bottle
caps of Blue Colt. San Gin estimates that out of the 300,000 bottles of Blue Colt sold during 2011, only
50% of the marked bottle caps will be redeemed. For the year 2011, 8,000 mugs were ordered by the
company at a total cost of P360,000. A total of 4,500 mugs were already distributed to customers. What
is the amount of the liability that San Gin Company should report on its December 31, 2011 statement
of financial position?

Ans A - P135,000

During 2011, San Gin Company guaranteed a supplier’s P500,000 loan from a bank. On October 1, 2011,
San Gin was notified that the supplier had defaulted on the loan and filed for bankruptcy protection.
Counsel believes San Gin will probably have to pay between P250,000 and P450,000 under its
guarantee. As a result of the supplier’s bankruptcy, San Gin entered into a contract in December 2011 to
retool its machines so that San Gin could accept parts from other suppliers. Retooling costs are
estimated to be P300,000. What amount should San Gin report as a liability in its December 31, 2011,
statement of financial position?

Ans C - P350,000
On January 2, 2009, San Gin Company introduced a new line of products that carry a three-year
warranty against factory defects. Estimated warranty costs related to peso sales are as follows: 1% of
sales in the year of sale, 2% in the year after sales and 3% in the second year after sale.

  Sales Actual Warranty

Expenditure

2009 P100,000 P     750

2010   250,000     3,750

2011   350,000   11,250

  P700,000 P15,750

What amount should San Gin report as warranty expense in 2011?

Ans D - P21,000

Receipt and disbursement cycle - Assessment

Which department cancels supporting documents after payment is mailed?

Ans D - Treasury

The person who signs the checks

Ans D - Is also responsible for mailing the checks

Internal control over cash receipts is weakened when an employee who receives customer mail receipts
also

Ans B - Records credits to individual accounts receivable

Which one of the following would the auditor consider to be an incompatible operation?

Ans C - The cashier posts the receipts to the accounts receivable subsidiary ledger cards

Which of the following procedures would an auditor most likely perform in auditing the statement of
cash flows?

Ans D - Reconcile the amounts included in the statement of cash flows to the other financial statements’
balances and amounts

Audit of cash balances - Assessment

The following data were taken from your current working papers in connection with your audit of the
Resolve Company’s financial statements for the year ended December 31, 2013.

Cash account consists of the following items:

                Petty cash fund                                    P    25,000

                Security Bank checking account            (37,500)

                Allied Bank current account                   344,250

                Total per GL                                          P  331,750

a.          The count of the cashier’s accountability on January 2, 2014, revealed total bills and coins of
P9,000. Unreplenished vouchers for various expenses totaled P16,000, of which P3,000 pertains to
January 2014.
b.          On December 29, 2013, a check for P87,500 was drawn against Security Bank current account
resulting in bank overdraft of P37,500. The check was picked up by the supplier on January 3, 2014.

c.          Bank reconciliation statement prepared by the cashier for the Allied bank account follows:

Bank balance                                                              P310, 500

Add: Deposit in transit             P61,250

          Bank service charges          1,250                        62,500

Total                                                                                   373,000

Less: Outstanding checks

                               Check no.        Amount

                                        214         P  2,500  *

                                        219           20,750

                                        225             6,000

                                        228             8,500                       28,750

Book balance                                                                P344,250

        *Check certified by the bank in December 2013.

All reconciling items were traced to the bank statement. Further investigation indicated that the
deposits in transit include a customer’s post-dated check amounting to P40,000. The check represents a
collection from account customer for sales made in the middle of October 2010.

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data, you are
to provide the answers to the following:

How much is the adjusted balance of petty cash fund as of December 31, 2013?

Ans A - P12,000

Cash receipts should be deposited on the day of receipt or the following business day.  Select the most
appropriate audit procedure to determine that cash is promptly deposited.

Ans D - Compare the daily cash receipts totals with the bank deposits

To gather evidence regarding the balance per books in a bank reconciliation, an auditor would most
likely examine

Ans D - General ledger

An auditor ordinarily should send a standard confirmation request to all banks with which the client has
done business during the year under audit, regardless of the year-end balance because this procedure

Ans C - Seek information about indebtedness to the bank

The primary evidence regarding year-end bank balances is documented in the

Ans A - Standard bank confirmations

The following data were taken from your current working papers in connection with your audit of the
Resolve Company’s financial statements for the year ended December 31, 2013.

Cash account consists of the following items:

                Petty cash fund                                    P    25,000

                Security Bank checking account            (37,500)

                Allied Bank current account                   344,250

                Total per GL                                          P  331,750

a.          The count of the cashier’s accountability on January 2, 2014, revealed total bills and coins of
P9,000. Unreplenished vouchers for various expenses totaled P16,000, of which P3,000 pertains to
January 2014.

b.          On December 29, 2013, a check for P87,500 was drawn against Security Bank current account
resulting in bank overdraft of P37,500. The check was picked up by the supplier on January 3, 2014.

c.          Bank reconciliation statement prepared by the cashier for the Allied bank account follows:

Bank balance                                                              P310, 500

Add: Deposit in transit             P61,250

          Bank service charges          1,250                        62,500

Total                                                                                   373,000

Less: Outstanding checks

                               Check no.        Amount

                                        214         P  2,500  *

                                        219           20,750

                                        225             6,000

                                        228             8,500                       28,750

Book balance                                                                P344,250

        *Check certified by the bank in December 2013.

All reconciling items were traced to the bank statement. Further investigation indicated that the
deposits in transit include a customer’s post-dated check amounting to P40,000. The check represents a
collection from account customer for sales made in the middle of October 2010.

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data, you are
to provide the answers to the following:

How much is the adjusted Allied Bank current account as of December 31, 2013?

Ans B - P296,500

The following data were taken from your current working papers in connection with your audit of the
Resolve Company’s financial statements for the year ended December 31, 2013.

Cash account consists of the following items:

                Petty cash fund                                    P    25,000

                Security Bank checking account            (37,500)

                Allied Bank current account                   344,250

                Total per GL                                          P  331,750

a.          The count of the cashier’s accountability on January 2, 2014, revealed total bills and coins of
P9,000. Unreplenished vouchers for various expenses totaled P16,000, of which P3,000 pertains to
January 2014.

b.          On December 29, 2013, a check for P87,500 was drawn against Security Bank current account
resulting in bank overdraft of P37,500. The check was picked up by the supplier on January 3, 2014.

c.          Bank reconciliation statement prepared by the cashier for the Allied bank account follows:

Bank balance                                                              P310, 500

Add: Deposit in transit             P61,250

          Bank service charges          1,250                        62,500

Total                                                                                   373,000

Less: Outstanding checks

                               Check no.        Amount

                                        214         P  2,500  *

                                        219           20,750

                                        225             6,000

                                        228             8,500                       28,750

Book balance                                                                P344,250

        *Check certified by the bank in December 2013.

All reconciling items were traced to the bank statement. Further investigation indicated that the
deposits in transit include a customer’s post-dated check amounting to P40,000. The check represents a
collection from account customer for sales made in the middle of October 2010.

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data, you are
to provide the answers to the following:

How much is the adjusted cash as of December 31, 2013?

Ans D - P358,500

Which of the following sets of information does an auditor usually confirm in one form?

Ans A - Cash in bank and collateral for loans

A proof of cash is normally used

Ans B - to test the transaction process when controls over cash are weak

The following data were taken from your current working papers in connection with your audit of the
Resolve Company’s financial statements for the year ended December 31, 2013.

Cash account consists of the following items:

                Petty cash fund                                    P    25,000

                Security Bank checking account            (37,500)

                Allied Bank current account                   344,250

                Total per GL                                          P  331,750

a.          The count of the cashier’s accountability on January 2, 2014, revealed total bills and coins of
P9,000. Unreplenished vouchers for various expenses totaled P16,000, of which P3,000 pertains to
January 2014.

b.          On December 29, 2013, a check for P87,500 was drawn against Security Bank current account
resulting in bank overdraft of P37,500. The check was picked up by the supplier on January 3, 2014.

c.          Bank reconciliation statement prepared by the cashier for the Allied bank account follows:

Bank balance                                                              P310, 500

Add: Deposit in transit             P61,250

          Bank service charges          1,250                        62,500

Total                                                                                   373,000

Less: Outstanding checks

                               Check no.        Amount

                                        214         P  2,500  *

                                        219           20,750

                                        225             6,000

                                        228             8,500                       28,750

Book balance                                                                P344,250

        *Check certified by the bank in December 2013.

All reconciling items were traced to the bank statement. Further investigation indicated that the
deposits in transit include a customer’s post-dated check amounting to P40,000. The check represents a
collection from account customer for sales made in the middle of October 2010.

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data, you are
to provide the answers to the following:

How much is the cash shortage as of December 31, 2013?

Ans C - P6,500

The auditor gathers evidence regarding the validity of deposits in transit by examining the

Ans B - cut off bank statement

Production cycle - Assessment

Which of these is implemented to maintain accurate inventory records?

Ans A - Periodic counts are conducted to adjust the perpetual records

Which of the following is a question that the auditor would expect to find on the production cycle
section of an internal control questionnaire?
Ans C - Are all releases by storekeepers of raw materials from storage based on approved requisition
documents?

A most likely procedure in obtaining an understanding of a manufacturing entity’s internal control over
inventory balances

Ans D - Reviewing the entity’s description of inventory policies and procedures

Audit of cost of goods sold balance - Assessment

When auditing merchandise inventory at year-end, the auditor performs a purchase cut-off test to
obtain evidence that:

Ans D - All goods owned at year-end are included in the inventory balance.

For several years a client’s physical inventory count has been lower than what was shown on the books
at the time of the count so that downward adjustments to the inventory account were required. 
Contributing to the inventory problem could be weaknesses in internal control that led to the failure to
record some

Ans A - Purchases returned to vendors.

Audit of inventory balances - manufacturing - Assessment

Cherry Lou Factory started operations in 2012. Cherry Lou manufactures bath towels. 60% of the
production are “class A” which sell for ₱500 per dozen and 40% are “class B” which sell for ₱250 per
dozen. During 2012, 6,000 dozens were produced at an average cost of ₱360 per dozen. The inventory
at the end of the year was as follows:

220 dozens “Class A”@ ₱360 ₱79,200

300 dozens “Class B”@ ₱360 108,000

  P187,200

The management considers the relative sales value method as a more equitable basis of cost
distribution.

Required:

How much is the cost of sales for the year 2012?

Ans B - ₱1,993,500

Cherry Lou Factory started operations in 2012. Cherry Lou manufactures bath towels. 60% of the
production are “class A” which sell for ₱500 per dozen and 40% are “class B” which sell for ₱250 per
dozen. During 2012, 6,000 dozens were produced at an average cost of ₱360 per dozen. The inventory
at the end of the year was as follows:

220 dozens “Class A”@ ₱360 ₱79,200

300 dozens “Class B”@ ₱360 108,000

  P187,200

The management considers the relative sales value method as a more equitable basis of cost
distribution.

 
Required:

How much is the value of inventory as of December 31,2012?

Ans C - ₱166,500

Cherry Lou Factory started operations in 2012. Cherry Lou manufactures bath towels. 60% of the
production are “class A” which sell for ₱500 per dozen and 40% are “class B” which sell for ₱250 per
dozen. During 2012, 6,000 dozens were produced at an average cost of ₱360 per dozen. The inventory
at the end of the year was as follows:

220 dozens “Class A”@ ₱360 ₱79,200

300 dozens “Class B”@ ₱360 108,000

  P187,200

The management considers the relative sales value method as a more equitable basis of cost
distribution.

Required:

How much of the total cost should be allocated to “Class A”?

Ans B - ₱1,620,000

Financing cycle - Assessment

An auditor’s program to examine long-term debt most likely would include steps that require

Ans B - Correlating interest expense recorded for the period with outstanding debt

Two months before the year end, the bookkeeper erroneously recorded the receipt of a long-term
bank     loan by a debit to cash and a credit to sales.  Which of the following is the most effective
procedure for detecting this type of error?

Ans C - Analyze bank confirmation information

Audit of interest expense and finance cost balances - Assessment

During the course of an audit, an auditor observes that the recorded interest expense seems excessive
in relation to the balance in long-term debt. This observation could lead the auditor to suspect that

Ans A - Long-term debt is understated.

In performing an audit, which one of the following procedures would be considered a "substantive"
test"?

Ans A - Comparing last year's interest expense with this year's interest expense.

Audit of non-trade liability balances

Bowles Corporation is in the business of leasing new sophisticated computer systems.  As a lessor of
computers , Bowles purchased a new system on December 31, 2011.  The system was delivered the
same day (by prior arrangement) to General Investment Company, a lessee.  The corporation accountant
revealed the following information relating to the lease transaction:

Cost of system to Bowles P550,000

 Estimated useful life and lease term 8 years

Expected residual value (unguaranteed) P40,000

Bowle’s implicit rate of interest 12%

General’s incremental borrowing rate 14%

Date of first lease payment Dec. 31, 2011

Additional information is as follows:

(a)    At the end of the lease, the system will revert to Bowles.

(b)   General is aware of Bowle’s rate of implicit interest.

(c)    The lease rental consists of equal annual payments.

Questions:

Based on the above and the result of your audit, answer the following: 

The annual lease payment under the lease is

Ans B - P95,950

Bowles Corporation is in the business of leasing new sophisticated computer systems.  As a lessor of
computers , Bowles purchased a new system on December 31, 2011.  The system was delivered the
same day (by prior arrangement) to General Investment Company, a lessee.  The corporation accountant
revealed the following information relating to the lease transaction:

Cost of system to Bowles P550,000

Estimated useful life and lease term 8 years

Expected residual value (unguaranteed) P40,000

Bowle’s implicit rate of interest 12%

General’s incremental borrowing rate 14%

Date of first lease payment Dec. 31, 2011

Additional information is as follows:

(a)    At the end of the lease, the system will revert to Bowles.

(b)   General is aware of Bowle’s rate of implicit interest.

(c)    The lease rental consists of equal annual payments.

Questions:

Based on the above and the result of your audit, answer the following: 

The amount to be reported under current liabilities as liability under finance lease as of December 31,
2012 is

Ans B - P48,611
Audit of equity accounts - Assessment

The equity section of Urbiztondo Corporation’s statement of financial position as of December 31, 2011
is as follows:

Shareholders’ Equity

Share capital, P5 par value; authorized,  

           2,000,000 shares; issued, 400,000 shares P2,000,000

Share premium 850,000

Retained earnings   3,000,000

  P5,850,000

The following events occurred during 2012:

               

Jan. 5 10,000 shares were sold for P9 per share.

Jan. 16  Declared a cash dividend of P0.40 per share, payable February 15 to shareholders of record
on February 5.

Feb. 10 40,000 shares were sold for P11 per share.

Mar. 1 A 40% share dividend was declared and issued.  Market value per share is currently P15.

April 1 A two-for-one split was carried out.  The par vale of the share was to be reduced to P2.50 
per share.  Market value on March 31 was P18  per share.

July 1 A 10% share dividend was declared and issued.  Market value is currently P10 per share.

Aug. 1 A cash dividend of P0.40 per share was declared, payable September 1 to shareholders of
record on August 21.

Dec. 31 Profit for 2012 was P1,880,000.

Questions:

Based on the above and the result of your audit, answer the following:

The number of shares issued and outstanding as of December 31, 2012 is

Ans B - P1,386,000

The equity section of Urbiztondo Corporation’s statement of financial position as of December 31, 2011
is as follows:

Shareholders’ Equity

Share capital, P5 par value; authorized,  

           2,000,000 shares; issued, 400,000 shares P2,000,000

Share premium 850,000

Retained earnings   3,000,000

  P5,850,000

 
The following events occurred during 2012:

               

Jan. 5 10,000 shares were sold for P9 per share.

Jan. 16  Declared a cash dividend of P0.40 per share, payable February 15 to shareholders of record
on February 5.

Feb. 10 40,000 shares were sold for P11 per share.

Mar. 1 A 40% share dividend was declared and issued.  Market value per share is currently P15.

April 1 A two-for-one split was carried out.  The par vale of the share was to be reduced to P2.50 
per share.  Market value on March 31 was P18  per share.

July 1 A 10% share dividend was declared and issued.  Market value is currently P10 per share.

Aug. 1 A cash dividend of P0.40 per share was declared, payable September 1 to shareholders of
record on August 21.

Dec. 31 Profit for 2012 was P1,880,000.

Questions:

Based on the above and the result of your audit, answer the following:

The balance of retained earnings as of December 31, 2012 is

Ans D - P2,001,600

The equity section of Urbiztondo Corporation’s statement of financial position as of December 31, 2011
is as follows:

Shareholders’ Equity

Share capital, P5 par value; authorized,  

           2,000,000 shares; issued, 400,000 shares P2,000,000

Share premium 850,000

Retained earnings   3,000,000

  P5,850,000

The following events occurred during 2012:

               

Jan. 5 10,000 shares were sold for P9 per share.

Jan. 16  Declared a cash dividend of P0.40 per share, payable February 15 to shareholders of record
on February 5.

Feb. 10 40,000 shares were sold for P11 per share.

Mar. 1 A 40% share dividend was declared and issued.  Market value per share is currently P15.

April 1 A two-for-one split was carried out.  The par vale of the share was to be reduced to P2.50 
per share.  Market value on March 31 was P18  per share.

July 1 A 10% share dividend was declared and issued.  Market value is currently P10 per share.

Aug. 1 A cash dividend of P0.40 per share was declared, payable September 1 to shareholders of
record on August 21.
 Dec. 31 Profit for 2012 was P1,880,000.

Questions:

Based on the above and the result of your audit, answer the following:

The balance of share premium as of December 31, 2012 is

Ans A - P2,075,000

The equity section of Urbiztondo Corporation’s statement of financial position as of December 31, 2011
is as follows:

Shareholders’ Equity

Share capital, P5 par value; authorized,  

           2,000,000 shares; issued, 400,000 shares P2,000,000

Share premium 850,000

Retained earnings   3,000,000

  P5,850,000

The following events occurred during 2012:

               

Jan. 5 10,000 shares were sold for P9 per share.

Jan. 16  Declared a cash dividend of P0.40 per share, payable February 15 to shareholders of record
on February 5.

Feb. 10 40,000 shares were sold for P11 per share.

Mar. 1 A 40% share dividend was declared and issued.  Market value per share is currently P15.

April 1 A two-for-one split was carried out.  The par vale of the share was to be reduced to P2.50 
per share.  Market value on March 31 was P18  per share.

July 1 A 10% share dividend was declared and issued.  Market value is currently P10 per share.

Aug. 1 A cash dividend of P0.40 per share was declared, payable September 1 to shareholders of
record on August 21.

Dec. 31 Profit for 2012 was P1,880,000.

Questions:

Based on the above and the result of your audit, answer the following:

The balance of share capital as of December 31, 2012 is

Ans A - P3,465,000

Investing cycle - Assessment

A weakness in internal control over recording retirements of equipment may cause an auditor to
Ans D - Select certain items of equipment from the accounting records and locate them in the plant.

Which of the following controls would a company most likely use to safeguard marketable securities
when an independent trust agent is not employed?

Ans B - Two company officials have joint control of marketable securities, which are kept in a bank safe-
deposit box.

Which of the following controls would be most effective in assuring that the proper custody of assets in
the investing cycle is maintained?

Ans D - The recorded balances in the investment subsidiary ledger are periodically compared with the
contents of the safe-deposit box by independent personnel.

Which of the following is not a control that is designed to protect investment securities?

Ans A - Custody over securities should be limited to individuals who have recordkeeping responsibility
over the securities.

Audit of investment account balances - Assessment

The following were made available to you as part of your audit of ABC Corp.’s investment accounts as of
and for the period ended December 31, 2012:

Acquisition FMV FMV

Cost (12/31/2011 (12/31/2012)

Aye Inc, Ordinary Shares P1,200,000 P1,300,000 P750,000

Bee Inc., Preference

Shares 2,100,000 1,900,000 2,240,000

See Corp., 10% 3,000,

P1,000 Bonds 3,100,000 3,200,000 3,180,000

Dee Corp., Ordinary

Shares 4,250,000 4,100,000 3,270,000

Audit notes:

a)      All the investments were acquired at the beginning of 2011. Broker’s fees and commission charged
to expense in 2011 related to share acquisition amounted to 10% of their acquisition cost while the
company incurred brokers’ fees and commission related to the bond acquisition amounted to P98,000.

b)      ABC Corp. owns 10,000 out of 100,000 ordinary shares outstanding of Aye Inc. which reported net
income in 2011 and in 2012 at P5m and P6M, respectively. Aye Inc. also paid dividends in 2011 at
P1.2M. On March 2012, ABC Corp. sold 4,000 of its stock investment in Aye at P150 per share.

c)       ABC Corp. owns 50% of the preference shares outstanding of Bee Inc. which reported net income
in 2011 and 2012 at P2M and P3m, respectively. The company also paid P500,000 dividends to
preference shares and P500,000 dividends to preference shares to ordinary shares in 2011 and P750,000
dividends to preference shares and P750,000 dividends to ordinary shares in 2012.

d)      The See Corp. bonds will mature on December 31, 2014. The yield rate on the acquisition date as a
result of the incurrence of the transaction cost was at 8%. Interests are receivable from bonds every
December 31.

 
e)      ABC Corp. owns 25,000 out of the 200,000 ordinary shares outstanding of Dee Corp. which
reported net income in 2011 and 2012 at P2M and P5M, respectively. Dee Corp. also paid dividends in
2011 and 2012 at P800,000 and P1M, respectively. On December 28, 2012 after receiving the dividends
declared for 2012, ABC Corp. sold 5,000 Dee Corp. shares at p160 per share.

Required:

Assuming that all the investments are accounted for as available-for-sale securities under PAS 39, what
is the unrealized holding gain/loss o be reported in the stockholders’ equity portion of the 2012
statement of financial position?

Ans C - 508,147.

The following were made available to you as part of your audit of ABC Corp.’s investment accounts as of
and for the period ended December 31, 2012:

Acquisition FMV FMV

Cost (12/31/2011 (12/31/2012)

Aye Inc, Ordinary Shares P1,200,000 P1,300,000 P750,000

Bee Inc., Preference

Shares 2,100,000 1,900,000 2,240,000

See Corp., 10% 3,000,

P1,000 Bonds 3,100,000 3,200,000 3,180,000

Dee Corp., Ordinary

Shares 4,250,000 4,100,000 3,270,000

Audit notes:

a)      All the investments were acquired at the beginning of 2011. Broker’s fees and commission charged
to expense in 2011 related to share acquisition amounted to 10% of their acquisition cost while the
company incurred brokers’ fees and commission related to the bond acquisition amounted to P98,000.

b)      ABC Corp. owns 10,000 out of 100,000 ordinary shares outstanding of Aye Inc. which reported net
income in 2011 and in 2012 at P5m and P6M, respectively. Aye Inc. also paid dividends in 2011 at
P1.2M. On March 2012, ABC Corp. sold 4,000 of its stock investment in Aye at P150 per share.

c)       ABC Corp. owns 50% of the preference shares outstanding of Bee Inc. which reported net income
in 2011 and 2012 at P2M and P3m, respectively. The company also paid P500,000 dividends to
preference shares and P500,000 dividends to preference shares to ordinary shares in 2011 and P750,000
dividends to preference shares and P750,000 dividends to ordinary shares in 2012.

d)      The See Corp. bonds will mature on December 31, 2014. The yield rate on the acquisition date as a
result of the incurrence of the transaction cost was at 8%. Interests are receivable from bonds every
December 31.

e)      ABC Corp. owns 25,000 out of the 200,000 ordinary shares outstanding of Dee Corp. which
reported net income in 2011 and 2012 at P2M and P5M, respectively. Dee Corp. also paid dividends in
2011 and 2012 at P800,000 and P1M, respectively. On December 28, 2012 after receiving the dividends
declared for 2012, ABC Corp. sold 5,000 Dee Corp. shares at p160 per share.
 

Required:

Assuming that all the investments are accounted for at fair market value through profit or losses under
PFRS 9, what is the unrealized holding gain/loss to be reported in the 2013 statement of comprehensive
income?

Ans D - 280,000.

The following were made available to you as part of your audit of ABC Corp.’s investment accounts as of
and for the period ended December 31, 2012:

Acquisition FMV FMV

Cost (12/31/2011 (12/31/2012)

Aye Inc, Ordinary Shares P1,200,000 P1,300,000 P750,000

Bee Inc., Preference

Shares 2,100,000 1,900,000 2,240,000

See Corp., 10% 3,000,

P1,000 Bonds 3,100,000 3,200,000 3,180,000

Dee Corp., Ordinary

Shares 4,250,000 4,100,000 3,270,000

Audit notes:

a)      All the investments were acquired at the beginning of 2011. Broker’s fees and commission charged
to expense in 2011 related to share acquisition amounted to 10% of their acquisition cost while the
company incurred brokers’ fees and commission related to the bond acquisition amounted to P98,000.

b)      ABC Corp. owns 10,000 out of 100,000 ordinary shares outstanding of Aye Inc. which reported net
income in 2011 and in 2012 at P5m and P6M, respectively. Aye Inc. also paid dividends in 2011 at
P1.2M. On March 2012, ABC Corp. sold 4,000 of its stock investment in Aye at P150 per share.

c)       ABC Corp. owns 50% of the preference shares outstanding of Bee Inc. which reported net income
in 2011 and 2012 at P2M and P3m, respectively. The company also paid P500,000 dividends to
preference shares and P500,000 dividends to preference shares to ordinary shares in 2011 and P750,000
dividends to preference shares and P750,000 dividends to ordinary shares in 2012.

d)      The See Corp. bonds will mature on December 31, 2014. The yield rate on the acquisition date as a
result of the incurrence of the transaction cost was at 8%. Interests are receivable from bonds every
December 31.

e)      ABC Corp. owns 25,000 out of the 200,000 ordinary shares outstanding of Dee Corp. which
reported net income in 2011 and 2012 at P2M and P5M, respectively. Dee Corp. also paid dividends in
2011 and 2012 at P800,000 and P1M, respectively. On December 28, 2012 after receiving the dividends
declared for 2012, ABC Corp. sold 5,000 Dee Corp. shares at p160 per share.

Required:
 Assuming that all the investments are accounted for at fair market value through profit or losses under
PAS 39, what is the realized gain/loss on sale of investments in 2012?

Ans A - 60,000.

Audit of property, plant and equipment account balances - Assessment

Belgium Company acquired the following assets and constructed a building as well. All this was done
during the current year.

Asset 1 and 2

These assets were purchased as a lump sum for P104,000 cash.  The following information was
gathered.

    Depreciation to    
Date on Seller’s
  Initial Cost on Book Value on  
Books
Seller’s Books Seller’s Books
Description Appraised Value

Machinery P100,000 P50,000 P50,000 P90,000

Office Equipment 60,000 10,000 50,000 30,000

Asset 3

This machine was acquired by making a P10,000 down payment and issuing a P30,000, 2-year, zero-
interest-bearing note.  The note is to be paid off in two P15,000 installments made at the end of the first
and second years.  It was estimated that the asset could have been purchased outright for P35,900.

Asset 4

This machinery was acquired by trading in used machinery.  (The exchange lacks commercial substance.)

Cost of machinery traded P100,000

Accumulated depreciation to date of sale 36,000

Fair value of machinery traded 80,000

Cash received 10,000

Fair value of machinery acquired 70,000

Asset 5

Office equipment was acquired by issuing 100 shares of P8 par value ordinary shares.  The shares have a
market value of P11 per share.

Asset 6

Belgium Company purchased office equipment for P20,000, terms 2/10, n/30.  Because the company
intended to take the discount, it made no entry until it paid for the acquisition.  The entry was:

     

Office Equipment 20,000  

 Cash   19,600

Purchase Discounts   400

                                                            

Asset 7

Belgium recently received a land from the Municipality of San Manuel as an inducement to locate its
business in the municipality.  The appraised value of the land is P270,000 but this was acquired San
Manuel 20 years ago at a cost of P20,000.  The company made no entry to record the land because it
had no cost basis.

Asset 8

Belgium Company constructed a building for P600,000.  It could have purchased the building for
P740,000.  The controller made the following entry.

     

Building 740,000  

Cash   600,000

Profit on Construction   140,000

What is the total cost of the office equipment?

Ans C - P46,700

Belgium Company acquired the following assets and constructed a building as well. All this was done
during the current year.

Asset 1 and 2

These assets were purchased as a lump sum for P104,000 cash.  The following information was
gathered.

    Depreciation to    
Date on Seller’s
  Initial Cost on Book Value on  
Books
Seller’s Books Seller’s Books
Description Appraised Value

Machinery P100,000 P50,000 P50,000 P90,000

Office Equipment 60,000 10,000 50,000 30,000

Asset 3

This machine was acquired by making a P10,000 down payment and issuing a P30,000, 2-year, zero-
interest-bearing note.  The note is to be paid off in two P15,000 installments made at the end of the first
and second years.  It was estimated that the asset could have been purchased outright for P35,900.

Asset 4

This machinery was acquired by trading in used machinery.  (The exchange lacks commercial substance.)

Cost of machinery traded P100,000

Accumulated depreciation to date of sale 36,000

Fair value of machinery traded 80,000

Cash received 10,000

 Fair value of machinery acquired 70,000

Asset 5

Office equipment was acquired by issuing 100 shares of P8 par value ordinary shares.  The shares have a
market value of P11 per share.

Asset 6

Belgium Company purchased office equipment for P20,000, terms 2/10, n/30.  Because the company
intended to take the discount, it made no entry until it paid for the acquisition.  The entry was:

     

Office Equipment 20,000  

Cash   19,600

Purchase Discounts   400

                                                            

Asset 7

Belgium recently received a land from the Municipality of San Manuel as an inducement to locate its
business in the municipality.  The appraised value of the land is P270,000 but this was acquired San
Manuel 20 years ago at a cost of P20,000.  The company made no entry to record the land because it
had no cost basis.

Asset 8

Belgium Company constructed a building for P600,000.  It could have purchased the building for
P740,000.  The controller made the following entry.

     

Building 740,000  

Cash   600,000

Profit on Construction   140,000

What is the cost of the building?

Ans A - P600,000

Problem 15

Belgium Company acquired the following assets and constructed a building as well. All this was done
during the current year.

Asset 1 and 2

These assets were purchased as a lump sum for P104,000 cash.  The following information was
gathered.

    Depreciation to    
Date on Seller’s
  Initial Cost on Book Value on  
Books
Seller’s Books Seller’s Books
Description Appraised
Value

Machinery P100,000 P50,000 P50,000 P90,000

Office Equipment 60,000 10,000 50,000 30,000

Asset 3

This machine was acquired by making a P10,000 down payment and issuing a P30,000, 2-year, zero-
interest-bearing note.  The note is to be paid off in two P15,000 installments made at the end of the first
and second years.  It was estimated that the asset could have been purchased outright for P35,900.

Asset 4

This machinery was acquired by trading in used machinery.  (The exchange lacks commercial substance.)

Cost of machinery traded P100,000

Accumulated depreciation to date of sale 36,000

Fair value of machinery traded 80,000

Cash received 10,000

Fair value of machinery acquired 70,000

Asset 5

Office equipment was acquired by issuing 100 shares of P8 par value ordinary shares.  The shares have a
market value of P11 per share.

Asset 6

Belgium Company purchased office equipment for P20,000, terms 2/10, n/30.  Because the company
intended to take the discount, it made no entry until it paid for the acquisition.  The entry was:

     

Office Equipment 20,000  

Cash   19,600

Purchase Discounts   400

                                                            

Asset 7

Belgium recently received a land from the Municipality of San Manuel as an inducement to locate its
business in the municipality.  The appraised value of the land is P270,000 but this was acquired San
Manuel 20 years ago at a cost of P20,000.  The company made no entry to record the land because it
had no cost basis.

Asset 8

Belgium Company constructed a building for P600,000.  It could have purchased the building for
P740,000.  The controller made the following entry.

     

Building 740,000  

Cash   600,000

Profit on Construction   140,000

                                                                                                                                                                                            
       

What is the total cost of the machinery?

Ans A - P167,900

Audit of intangible account balances - Assessment

SCAR, Inc. reported other noncurrent asset account balances on December 31, 2010, as follows;

Patent P192,000

Accumulated amortization  (24,000)

Net patent P168,000

Transactions during 2011 and other information relating to SCAR’s other noncurrent assets included the
following:

a.       The patent was purchased from Ruby Company on January 2, 2009, when the remaining legal life
was 16 years. On January 2, 2011, SCAR determined that the remaining useful life of the patent was only
eight years from the date of its acquisition.

b.      On January 3, 2011, in connection with the purchase of a trademark from the Golden Corp., the
parties entered into a noncompetition agreement. SCAR paid Golden P800,000, of which three-quarters
related to the trademark and one-quarter reflected Golden’s agreement not to compete for a period of
five years in the line of business covered by the trademark. SCAR considers the life of the trademark to
be indefinite.

c.       On January 3, 2011. SCAR acquired all the noncash assets and assumed all liabilities of White
Company at a cash purchase price of P1,200,000. SCAR determined that the fair value of the net assets
acquired in the transaction is P800,000.

What is the carrying amount of intangibles at December 31, 2011?

Ans A - 1,300,000

SCAR, Inc. reported other noncurrent asset account balances on December 31, 2010, as follows;

Patent P192,000

Accumulated amortization  (24,000)

Net patent P168,000

Transactions during 2011 and other information relating to SCAR’s other noncurrent assets included the
following:

a.       The patent was purchased from Ruby Company on January 2, 2009, when the remaining legal life
was 16 years. On January 2, 2011, SCAR determined that the remaining useful life of the patent was only
eight years from the date of its acquisition.

b.      On January 3, 2011, in connection with the purchase of a trademark from the Golden Corp., the
parties entered into a noncompetition agreement. SCAR paid Golden P800,000, of which three-quarters
related to the trademark and one-quarter reflected Golden’s agreement not to compete for a period of
five years in the line of business covered by the trademark. SCAR considers the life of the trademark to
be indefinite.

c.       On January 3, 2011. SCAR acquired all the noncash assets and assumed all liabilities of White
Company at a cash purchase price of P1,200,000. SCAR determined that the fair value of the net assets
acquired in the transaction is P800,000.

What is the total amortization expense of intangible assets in 2011?

Ans C - 68,000

Course Assessment

Examples of circumstances that create intimidation threats for a professional accountant in public
practice include the following except:

Ans D - The firm promoting shares in an audit client

An accountant who had begun an audit of the financial statements of an entity was asked to change the
engagement to a review. Given reasonable justification for the change, the accountant’s review report
should refer to the

  Original Engagement Procedures that may have been

that was Agreed To performed in the original engagement
 

Ans C - No No

Which of the following is incorrect about the auditor’s risk assessment procedures?

Ans C - The auditor should perform substantive procedures and tests of controls after the risk
assessment procedures are performed.

Buddy, the purchasing agent of Lander Hardware Wholesalers, has a relative who owns a retail
hardware store. Buddy arranged for hardware to be delivered by manufacturers to the retail store on a
COD basis, thereby enabling his relative to buy at Lander's wholesale prices. Buddy was probably able to
accomplish this because of Lander's poor internal control over

Ans D - Purchase orders.

Theoretically, which of the following would not have an effect on the amount of audit evidence
gathered by the auditor?

Ans D - Whether or not the client reports to the Securities and Exchange Commission.

For initial engagements, PSA 510 does not require the auditor to obtain sufficient audit evidence:

Ans D - That the prior period financial statements were audited by an independent CPA.

When analytical procedures identify significant fluctuations or relationships or relationships that are
inconsistent with other relevant information or that deviate from predicted amounts, the auditor should

Ans D - Conduct further investigatio

Which of the following circumstances least likely result to either a qualified opinion or an auditor
disclaiming his opinion?

Ans A - The auditor is unable to carry out an audit procedure believed to be desirable; the auditor
carried out alternative audit procedures to support the management’s assertion

The following statements relate to unaudited prior year financial statements that are presented in
comparative form with audited current year financial statements.
Which is incorrect?

Ans A - The incoming auditor should state in the auditor’s report that the comparative financial
statements are unaudited.

The audit procedures for the subsequent events review can be divided into two categories: (1)
procedures normally integrated as a part of the verification of year-end account balances, and (2) those
performed specifically for the purpose of discovering subsequent events. Which of the following
procedures are in category 2?

SOLUTION: PSA 560 par. 5

Ans B - Correspond with attorneys

When conditions and events have been identified  which may cast significant doubt on the entity’s
ability to continue as a going concern, the auditor should consider performing the following procedures
except

SOLUTION: PSA 570 par. 26

Ans D - Express a report that contains a disclaimer of opinion.

A CIS where two or more personal computers are linked together through the use of special software
and communication lines and allows the sharing of application software, data files, and computer
peripherals such as printers and optical scanners is a/an

Ans A - Local area network (LAN).

Who is ultimately responsible for the design and implementation of cost-effective controls in a CIS
environment?

Ans C - The entity’s management

Which of the following features is least likely to be found in an online, real-time processing system?

Ans A - Turnaround documents

What is meant by a financial forecast?

Ans B - A prospective financial statement that presents an entity’s expected financial position, results of
operations, and cash flows.

In its financial statements for the year ended. December 31, 2018 TBB COMPANY reported P73, 500
revenue (sales), P53, 500 costs of goods sold, P6, 000 income tax expense, P20, 000 retained earnings at
January 1, 2018 and P34, 000 retained earnings at December 31, 2018.

In 2019, after the 2018 financial statements were approved for issue, TBB COMPANY discovered that
some products sold in 2018 were incorrectly included in inventories at December 31, 2018 at their cost
of P6, 500. In 2019, TBB COMPANY changed its accounting policy for the measurement of investments
property after initial recognition from the cost model to the fair value model. It acquired its only
investments property for P3, 000 many years ago, The fair value of the investment was determined on
December 31, 2019 a P25, 000. (P20, 000 in 2018 and P18, 000 in 2017). At December 31, 2019, as a
result of the invention of improved lubricants, TBB COMPANY reassessed the useful life of Machine A
from four years to seven years. Machine A is depreciated on the straight-line method to a nil residual
value. It was acquired for P6, 000 on January 1, 2017. Inventories of the type manufactured by Machine
A were immaterial at the end of each reporting period.

TBB COMPANY’s accounting records for the year ended December 31, 2019, before accounting for the
change in accounting policy and before accounting for the change in accounting estimate, record P104,
000 revenue( asset) , P86, 500 costs of goods sold and P5, 050 income tax expense.

Assume that the income tax rate is 30%

What is the adjusted net income in 2019?

Ans A - 20, 930

In its financial statements for the year ended. December 31, 2018 TBB COMPANY reported P73, 500
revenue (sales), P53, 500 costs of goods sold, P6, 000 income tax expense, P20, 000 retained earnings at
January 1, 2018 and P34, 000 retained earnings at December 31, 2018.

In 2019, after the 2018 financial statements were approved for issue, TBB COMPANY discovered that
some products sold in 2018 were incorrectly included in inventories at December 31, 2018 at their cost
of P6, 500. In 2019, TBB COMPANY changed its accounting policy for the measurement of investments
property after initial recognition from the cost model to the fair value model. It acquired its only
investments property for P3, 000 many years ago, The fair value of the investment was determined on
December 31, 2019 a P25, 000. (P20, 000 in 2018 and P18, 000 in 2017). At December 31, 2019, as a
result of the invention of improved lubricants, TBB COMPANY reassessed the useful life of Machine A
from four years to seven years. Machine A is depreciated on the straight-line method to a nil residual
value. It was acquired for P6, 000 on January 1, 2017. Inventories of the type manufactured by Machine
A were immaterial at the end of each reporting period.

TBB COMPANY’s accounting records for the year ended December 31, 2019, before accounting for the
change in accounting policy and before accounting for the change in accounting estimate, record P104,
000 revenue( asset) , P86, 500 costs of goods sold and P5, 050 income tax expense.

Assume that the income tax rate is 30%

What is the amount that should be charged against retained earnings in 2019 as a result of the above
accounting changes and errors?

Ans B - 7, 350

In its financial statements for the year ended. December 31, 2018 TBB COMPANY reported P73, 500
revenue (sales), P53, 500 costs of goods sold, P6, 000 income tax expense, P20, 000 retained earnings at
January 1, 2018 and P34, 000 retained earnings at December 31, 2018.

In 2019, after the 2018 financial statements were approved for issue, TBB COMPANY discovered that
some products sold in 2018 were incorrectly included in inventories at December 31, 2018 at their cost
of P6, 500. In 2019, TBB COMPANY changed its accounting policy for the measurement of investments
property after initial recognition from the cost model to the fair value model. It acquired its only
investments property for P3, 000 many years ago, The fair value of the investment was determined on
December 31, 2019 a P25, 000. (P20, 000 in 2018 and P18, 000 in 2017). At December 31, 2019, as a
result of the invention of improved lubricants, TBB COMPANY reassessed the useful life of Machine A
from four years to seven years. Machine A is depreciated on the straight-line method to a nil residual
value. It was acquired for P6, 000 on January 1, 2017. Inventories of the type manufactured by Machine
A were immaterial at the end of each reporting period.

TBB COMPANY’s accounting records for the year ended December 31, 2019, before accounting for the
change in accounting policy and before accounting for the change in accounting estimate, record P104,
000 revenue( asset) , P86, 500 costs of goods sold and P5, 050 income tax expense.

Assume that the income tax rate is 30%

What is the adjusted net income in 2018?

Ans A - 10, 850

You are auditing the cash of Watson Corp. for the fiscal year ended September 30, 2019.

The bank reconciliation prepared by the account of Watson Corp. for the month of August is presented
below:

Bank balance, per bank statement P156,000

Add: Deposit in transit, August 31 2,700

Total 158,700

Less: Outstanding checks  

    No. 547                    P 600  

           561                    5,400  

           562                    4,200  

           565                    1,800 12,000

Adjusted Balance 146,700

   

Book balance, per general ledger P120,000

Add: Proceeds of note receivable collected by bank in August 24,000

         Deposit made in bank on August 31 not recorded on books

until

            September 3,000

Total 147,000

Less: Bank Service charge 300

Adjusted Balance 146,700

There was no available bank reconciliation for the month of September; instead, the accountant
provided you a copy of the September bank statement to aid you in your audit.

The September bank statement included the following bank debits and credits:

Date Particulars Debits   Credits  

Aug 31          

Sep 1 Chk #561 5,400   2,700  

Sep 6 Chk #562 4,200      

Sep 9 Chk #565 1,800   30,000  

Sep 12   420 DM 420  

Sep 15 Chk #566 3,000      

 Sep 17       600  

Sep 20 Chk #567 2,100   42,000  

Sep 27 Chk #569 4,320      

Sep 29   300 EC 300 EC

Sep 30   1,320 SV    

Sep 30   900 DM    

Sep 30 Chk #570 5,460      

  SV – Service Charges DM – Debit Memo

  EC – Error Corrected CM – Credit Memo

Further investigation revealed the following information:

a.        All book reconciling items during August has been recorded in September.

b.       The check register revealed that the last check issued in September was No. 571 for P3,000 and
that check No. 568 was P7,200.

c.        Cash received for the period September 25 through 31 of P28,200 was deposited in the bank on
October 1.

d.       The debit memo on September 12 and September 30 were customer NSF checks returned by the
bank. The check on September 12 was immediately redepostied without entry. The check returned on
September 31 was redeposited by the client in the bank on October 1 also without entry.

e.        Among the bank credits for the month was P600 deposit of Irene Corp. credited by the bank to
the company’s account.

Requirements: Based on your audit procedures and appreciation of the above data, answer the
following:

How much is the adjusted cash balance as of September 30, 2019?

Sol.

SOLUTION
BANK Aug 31 Receipts Disbursements Sep 30
Unadjusted balances 156,000 76,020 29,220 202,800
DIT – August 2,700 (2,700)    
DIT – September   28,200   28,200
OC – August (12,000)   (12,000)  
OC – September     10,800 (10,800)
Bank error – Sep   (300) (300)  
corrected also in Sep
Bank error –   (600)   (600)
Overstated receipt
Adjusted balances 146,700 100,620 27,720 219,600
         
BOOK Aug 31 Receipts Disbursements Sep 30
Unadjusted balances 120,000 127,200 25,380 221,820
Unrecorded credit – 27,000 (27,000)    
Aug
BSC – Aug (300)   (300)  
BSC – Sep     1,320 (1,320)
 NSF – Sep 12   420 420  
NSF – Sep 30     900 (900)
Adjusted balances 146,700 100,620 27,720 219,600

Ans B - 219,600

You are auditing the cash of Watson Corp. for the fiscal year ended September 30, 2019.

The bank reconciliation prepared by the account of Watson Corp. for the month of August is presented
below:

Bank balance, per bank statement P156,000

Add: Deposit in transit, August 31 2,700

Total 158,700

Less: Outstanding checks  

    No. 547                    P 600  

           561                    5,400  

           562                    4,200  

           565                    1,800 12,000

Adjusted Balance 146,700

   

Book balance, per general ledger P120,000

Add: Proceeds of note receivable collected by bank in August 24,000

         Deposit made in bank on August 31 not recorded on books

until

            September 3,000

Total 147,000

Less: Bank Service charge 300

Adjusted Balance 146,700

There was no available bank reconciliation for the month of September; instead, the accountant
provided you a copy of the September bank statement to aid you in your audit.

The September bank statement included the following bank debits and credits:

Date Particulars Debits   Credits  

Aug 31          

Sep 1 Chk #561 5,400   2,700  

Sep 6 Chk #562 4,200      

Sep 9 Chk #565 1,800   30,000  

Sep 12   420 DM 420  

Sep 15 Chk #566 3,000      

 Sep 17       600  

Sep 20 Chk #567 2,100   42,000  

Sep 27 Chk #569 4,320      

Sep 29   300 EC 300 EC

Sep 30   1,320 SV    

Sep 30   900 DM    

Sep 30 Chk #570 5,460      

  SV – Service Charges DM – Debit Memo

  EC – Error Corrected CM – Credit Memo

Further investigation revealed the following information:

a.        All book reconciling items during August has been recorded in September.

b.       The check register revealed that the last check issued in September was No. 571 for P3,000 and
that check No. 568 was P7,200.

c.        Cash received for the period September 25 through 31 of P28,200 was deposited in the bank on
October 1.

d.       The debit memo on September 12 and September 30 were customer NSF checks returned by the
bank. The check on September 12 was immediately redepostied without entry. The check returned on
September 31 was redeposited by the client in the bank on October 1 also without entry.

e.        Among the bank credits for the month was P600 deposit of Irene Corp. credited by the bank to
the company’s account.

Requirements: Based on your audit procedures and appreciation of the above data, answer the
following

How much is the total book receipts for September

Ans C - 127,200

You are auditing the cash of Watson Corp. for the fiscal year ended September 30, 2019.

The bank reconciliation prepared by the account of Watson Corp. for the month of August is presented
below:

Bank balance, per bank statement P156,000

Add: Deposit in transit, August 31 2,700

Total 158,700

Less: Outstanding checks  

    No. 547                    P 600  

           561                    5,400  

           562                    4,200  

           565                    1,800 12,000

 Adjusted Balance 146,700

   

Book balance, per general ledger P120,000

Add: Proceeds of note receivable collected by bank in August 24,000

         Deposit made in bank on August 31 not recorded on books

until

            September 3,000

Total 147,000

Less: Bank Service charge 300

Adjusted Balance 146,700

There was no available bank reconciliation for the month of September; instead, the accountant
provided you a copy of the September bank statement to aid you in your audit.

The September bank statement included the following bank debits and credits:

Date Particulars Debits   Credits  

Aug 31          

Sep 1 Chk #561 5,400   2,700  

Sep 6 Chk #562 4,200      

Sep 9 Chk #565 1,800   30,000  

Sep 12   420 DM 420  

Sep 15 Chk #566 3,000      

Sep 17       600  

Sep 20 Chk #567 2,100   42,000  

Sep 27 Chk #569 4,320      

Sep 29   300 EC 300 EC

Sep 30   1,320 SV    

Sep 30   900 DM    

Sep 30 Chk #570 5,460      

  SV – Service Charges DM – Debit Memo

  EC – Error Corrected CM – Credit Memo

Further investigation revealed the following information:

a.        All book reconciling items during August has been recorded in September.

b.       The check register revealed that the last check issued in September was No. 571 for P3,000 and
that check No. 568 was P7,200.

c.        Cash received for the period September 25 through 31 of P28,200 was deposited in the bank on
October 1.
d.       The debit memo on September 12 and September 30 were customer NSF checks returned by the
bank. The check on September 12 was immediately redepostied without entry. The check returned on
September 31 was redeposited by the client in the bank on October 1 also without entry.

e.        Among the bank credits for the month was P600 deposit of Irene Corp. credited by the bank to
the company’s account.

Requirements: Based on your audit procedures and appreciation of the above data, answer the
following:

How much is the total book disbursements for September?

Ans B - 25,380

The accountant of Chu Corp. presented to you the following details of its subsidiary ledger in relation to
your audit of the company’s accounts receivable balance as of December 31, 2019:

Customer Invoice Date Amount

Sushean Inc. December. 20 550, 000

  December. 1 1, 200, 000

  October. 11 950, 000

  August. 4 420, 000

Karen Co. November. 20 2, 000, 000

  September. 4 900, 000

  August. 2 500, 000

Jenkeen Inc. December. 10 1, 750, 000

  October. 4 600, 000

  July. 5 500, 000

Mara Corp. September. 9 2, 600, 000

  July. 10 1, 250, 000

  March. 5 900, 000

Monet Co. December. 1 (500, 000)

Audit notes:

a.        The company’s term is n/60 days.

b.       The company’s general ledger shows the following balances as of December 31, 2019:

Accounts Receivable P13, 650, 000

Allowance for doubtful accounts (950, 000)

c.        The credit balance of the receivable resulted from Monet Co.’s overpayment of its account. The
same shall be settled by a delivery of merchandise the following period:

 
d.       You have discovered that JenKeen Inc’s payment of an October 4 invoices amounting to P600, 000
was posted against Karen Co’s account for an invoice dated December 4, for the same amount.

e.        Discussions with the credit department manager revealed the following appropriate credit policy:

Doubtful of
Accounts receivable age collection

Current 2%

1-60 days past due 5%

61-120 days past due 20%

More than 120 days past

due 50%

Requirements:

What is the correct accounts receivable balance as of December 31, 2019?

Ans A - 14, 120, 000

The accountant of Chu Corp. presented to you the following details of its subsidiary ledger in relation to
your audit of the company’s accounts receivable balance as of December 31, 2019:

Customer Invoice Date Amount

Sushean Inc. December. 20 550, 000

  December. 1 1, 200, 000

  October. 11 950, 000

  August. 4 420, 000

Karen Co. November. 20 2, 000, 000

  September. 4 900, 000

  August. 2 500, 000

Jenkeen Inc. December. 10 1, 750, 000

  October. 4 600, 000

  July. 5 500, 000

Mara Corp. September. 9 2, 600, 000

  July. 10 1, 250, 000

  March. 5 900, 000

Monet Co. December. 1 (500, 000)

Audit notes:

a.        The company’s term is n/60 days.

 

b.       The company’s general ledger shows the following balances as of December 31, 2019:

Accounts Receivable P13, 650, 000

Allowance for doubtful accounts (950, 000)

c.        The credit balance of the receivable resulted from Monet Co.’s overpayment of its account. The
same shall be settled by a delivery of merchandise the following period:

d.       You have discovered that JenKeen Inc’s payment of an October 4 invoices amounting to P600, 000
was posted against Karen Co’s account for an invoice dated December 4, for the same amount.

e.        Discussions with the credit department manager revealed the following appropriate credit policy:

Doubtful of
Accounts receivable age collection

Current 2%

1-60 days past due 5%

61-120 days past due 20%

More than 120 days past

due 50%

Requirements:

How much is the unreconciled difference between the control account and the subsidiary ledger?

Ans B - 30, 000

The accountant of Chu Corp. presented to you the following details of its subsidiary ledger in relation to
your audit of the company’s accounts receivable balance as of December 31, 2019:

Customer Invoice Date Amount

Sushean Inc. December. 20 550, 000

  December. 1 1, 200, 000

  October. 11 950, 000

  August. 4 420, 000

Karen Co. November. 20 2, 000, 000

  September. 4 900, 000

  August. 2 500, 000

Jenkeen Inc. December. 10 1, 750, 000

  October. 4 600, 000

   July. 5 500, 000

Mara Corp. September. 9 2, 600, 000

  July. 10 1, 250, 000

  March. 5 900, 000

Monet Co. December. 1 (500, 000)

Audit notes:

a.        The company’s term is n/60 days.

b.       The company’s general ledger shows the following balances as of December 31, 2019:

Accounts Receivable P13, 650, 000

Allowance for doubtful accounts (950, 000)

c.        The credit balance of the receivable resulted from Monet Co.’s overpayment of its account. The
same shall be settled by a delivery of merchandise the following period:

d.       You have discovered that JenKeen Inc’s payment of an October 4 invoices amounting to P600, 000
was posted against Karen Co’s account for an invoice dated December 4, for the same amount.

e.        Discussions with the credit department manager revealed the following appropriate credit policy:

Doubtful of
Accounts receivable age collection

Current 2%

1-60 days past due 5%

61-120 days past due 20%

More than 120 days past

due 50%

Requirements:

Assuming that there were no other entries affecting the allowance for bad debts, what is the correct bad
debts expense for 2019?

SOLUTION
More
1 – 60 61 – 120
  GL Current than 120
days days
days
Sushean, Inc.          
    December 20   550,000      
     December 1   1,200,000      
    October 11     950,000    
    August 4       420,000  
Karen Co.          
    November 20   2,000,000      
    September 4     900,000    
    August 2       500,000  
Jenkeen Inc.          
    December 10   1,750,000      
    October 4     600,000    
    July 5       500,000  
Mara Corp.          
    September 9     2,600,000    
    July 10       1,250,000  
    March 5         900,000
Monet Co.          
    December 1   (500,000)      
Unadjusted Balances 13,650,000 5,000,000 5,050,000 2,670,000 900,000
Advances from Customers 500,000 500,000      
– Monet Co.
Posting Errors   600,000 (600,000)    
Adjusted Balances 14,150,000 6,100,000 4,450,000 2,670,000 900,000
Adjusted to Sales (30,000)        
Correct Balances 14,120,000 6,100,000 4,450,000 2,670,000 900,000
    2% 5% 20% 50%
Allowance –end (1,328,500) 122,000 222,500 534,000 450,000
           
Allowance – beg 950,000        
Bad Debt Expense 378,500        
Allowance – end 1,328,500        

Ans C - 378, 500

You are engaged in the regular annual examination of the accounts and records of Joya Manufacturing
Co. for the year ended December 31, 2019. To reduce the workload at year end, the company, upon
your recommendation, took its annual physical inventory on November 30, 2019. You observed the
taking of the inventory and made tests of the inventory count and the inventory records.

The company’s inventory account, which includes raw materials and work-in-process is on perpetual
basis. Inventories are valued at cost, first-in, first-out method. There is no finished goods inventory.

The company’s physical inventory revealed that the book inventory of P3,391,920 was understated by
P168,000. To avoid delay in completing its monthly financial statements, the company decided not to
adjust the book inventory until year-end except for obsolete inventory items.

Your examination disclosed the following information regarding the November 30 inventory:

a.        Pricing tests showed that the physical inventory was overstated by P123,200.

b.       An understatement of the physical inventory by P8,400 due to errors in footings and extensions.

c.        Direct labor included in the inventory amounted to P560,000. Overhead was included at the rate
of 200% of direct labor. You have ascertained that the amount of direct labor was correct and that the
overhead rate was proper.
d.       The physical inventory included obsolete materials with a total cost of P14,000. During December,
the obsolete materials were written off by a charge to cost of sales.

Your audit also disclosed the following information about the December 31 inventory:

a.        Total debits to the following accounts during December were:

Cost of sales P3,841,600

Direct labor 677,600

Purchases 1,383,200

b.       The cost of sales of P3,841,600 included direct labor of P772,800.

Based on the above and the result of your audit, determine the following:

Cost of materials on hand, and materials included in work in process as of December 31, 201

Ans B - P1,625,120

You are engaged in the regular annual examination of the accounts and records of Joya Manufacturing
Co. for the year ended December 31, 2019. To reduce the workload at year end, the company, upon
your recommendation, took its annual physical inventory on November 30, 2019. You observed the
taking of the inventory and made tests of the inventory count and the inventory records.

The company’s inventory account, which includes raw materials and work-in-process is on perpetual
basis. Inventories are valued at cost, first-in, first-out method. There is no finished goods inventory.

The company’s physical inventory revealed that the book inventory of P3,391,920 was understated by
P168,000. To avoid delay in completing its monthly financial statements, the company decided not to
adjust the book inventory until year-end except for obsolete inventory items.

Your examination disclosed the following information regarding the November 30 inventory:

a.        Pricing tests showed that the physical inventory was overstated by P123,200.

b.       An understatement of the physical inventory by P8,400 due to errors in footings and extensions.

c.        Direct labor included in the inventory amounted to P560,000. Overhead was included at the rate
of 200% of direct labor. You have ascertained that the amount of direct labor was correct and that the
overhead rate was proper.

d.       The physical inventory included obsolete materials with a total cost of P14,000. During December,
the obsolete materials were written off by a charge to cost of sales.

Your audit also disclosed the following information about the December 31 inventory:

a.        Total debits to the following accounts during December were:

 Cost of sales P3,841,600

Direct labor 677,600

Purchases 1,383,200

b.       The cost of sales of P3,841,600 included direct labor of P772,800.

Based on the above and the result of your audit, determine the following:

The amount of direct labor included in work in process as of December 31, 2019

Ans B - P   464,800

You are engaged in the regular annual examination of the accounts and records of Joya Manufacturing
Co. for the year ended December 31, 2019. To reduce the workload at year end, the company, upon
your recommendation, took its annual physical inventory on November 30, 2019. You observed the
taking of the inventory and made tests of the inventory count and the inventory records.

The company’s inventory account, which includes raw materials and work-in-process is on perpetual
basis. Inventories are valued at cost, first-in, first-out method. There is no finished goods inventory.

The company’s physical inventory revealed that the book inventory of P3,391,920 was understated by
P168,000. To avoid delay in completing its monthly financial statements, the company decided not to
adjust the book inventory until year-end except for obsolete inventory items.

Your examination disclosed the following information regarding the November 30 inventory:

a.        Pricing tests showed that the physical inventory was overstated by P123,200.

b.       An understatement of the physical inventory by P8,400 due to errors in footings and extensions.

c.        Direct labor included in the inventory amounted to P560,000. Overhead was included at the rate
of 200% of direct labor. You have ascertained that the amount of direct labor was correct and that the
overhead rate was proper.

d.       The physical inventory included obsolete materials with a total cost of P14,000. During December,
the obsolete materials were written off by a charge to cost of sales.

Your audit also disclosed the following information about the December 31 inventory:

a.        Total debits to the following accounts during December were:

Cost of sales P3,841,600

Direct labor 677,600

Purchases 1,383,200

b.       The cost of sales of P3,841,600 included direct labor of P772,800.

 
Based on the above and the result of your audit, determine the following:

Adjusted amount of physical inventory at November 30, 2019

Ans A - P3,431,120

Holmes Appliance Center reports the following liability items in its balance sheet as of December 31,
2019:

Liability for unredeemed coupons 109,750

Unearned service contracts 300,000

Accrued officer bonuses 0

The liability for unredeemed coupons are in relation to discount coupons distributed by the company to
customers who may present the same within a stated expiration date to various company distributors to
avail of theme discounts as indicated in the face of the coupons. Distributors are reimbursed for the face
value of coupons redeemed, plus 10% of the coupon value for handling costs. The company honors
requests for coupon reimbursements to distributors three months after the expiration date. In Holmes’s
experience 75% of the coupons issued ultimately are redeemed by the customers. Total face value of
coupons issued during the year and expiring on December 31, 2019 amounted to P250,000 while total
payments to distributors as of the same date is at P140,250. The total coupon value was set up as a
liability while the total payments where charged against the liability set up.

Aside from the company’s normal selling operations, it also sells equipment service contracts agreeing
to service equipment for a two-year period. Revenue from service contracts is recognized as earned
over the lives of the contracts. Additional information shows that Unearned service contract revenue at
January 1, 2019 is at P100,000; Cash receipts from service contracts sold is at P490,000 recorded as
revenue; Service contract revenue actually realized is at P430,000.

The company provides a special bonus for its executive officers based on 10% of its net income before
bonus but after income tax. Net income for the year before tax and before adjustments related to the
previous information is at P1,016,250 (Assume income tax rate at 35%). Accrual is yet to be made on the
bonuses.

Requirements:

What is the adjusted balance of the liability for unredeemed coupons?

Ans C -  66,000

Holmes Appliance Center reports the following liability items in its balance sheet as of December 31,
2019:

Liability for unredeemed coupons 109,750

Unearned service contracts 300,000

Accrued officer bonuses 0

The liability for unredeemed coupons are in relation to discount coupons distributed by the company to
customers who may present the same within a stated expiration date to various company distributors to
avail of theme discounts as indicated in the face of the coupons. Distributors are reimbursed for the face
value of coupons redeemed, plus 10% of the coupon value for handling costs. The company honors
requests for coupon reimbursements to distributors three months after the expiration date. In Holmes’s
experience 75% of the coupons issued ultimately are redeemed by the customers. Total face value of
coupons issued during the year and expiring on December 31, 2019 amounted to P250,000 while total
payments to distributors as of the same date is at P140,250. The total coupon value was set up as a
liability while the total payments where charged against the liability set up.

Aside from the company’s normal selling operations, it also sells equipment service contracts agreeing
to service equipment for a two-year period. Revenue from service contracts is recognized as earned
over the lives of the contracts. Additional information shows that Unearned service contract revenue at
January 1, 2019 is at P100,000; Cash receipts from service contracts sold is at P490,000 recorded as
revenue; Service contract revenue actually realized is at P430,000.

The company provides a special bonus for its executive officers based on 10% of its net income before
bonus but after income tax. Net income for the year before tax and before adjustments related to the
previous information is at P1,016,250 (Assume income tax rate at 35%). Accrual is yet to be made on the
bonuses.

Requirements:

What is the adjusted balance of the unearned service contracts?

Ans C - 360,000

Holmes Appliance Center reports the following liability items in its balance sheet as of December 31,
2019:

Liability for unredeemed coupons 109,750

Unearned service contracts 300,000

Accrued officer bonuses 0

The liability for unredeemed coupons are in relation to discount coupons distributed by the company to
customers who may present the same within a stated expiration date to various company distributors to
avail of theme discounts as indicated in the face of the coupons. Distributors are reimbursed for the face
value of coupons redeemed, plus 10% of the coupon value for handling costs. The company honors
requests for coupon reimbursements to distributors three months after the expiration date. In Holmes’s
experience 75% of the coupons issued ultimately are redeemed by the customers. Total face value of
coupons issued during the year and expiring on December 31, 2019 amounted to P250,000 while total
payments to distributors as of the same date is at P140,250. The total coupon value was set up as a
liability while the total payments where charged against the liability set up.

Aside from the company’s normal selling operations, it also sells equipment service contracts agreeing
to service equipment for a two-year period. Revenue from service contracts is recognized as earned
over the lives of the contracts. Additional information shows that Unearned service contract revenue at
January 1, 2019 is at P100,000; Cash receipts from service contracts sold is at P490,000 recorded as
revenue; Service contract revenue actually realized is at P430,000.

The company provides a special bonus for its executive officers based on 10% of its net income before
bonus but after income tax. Net income for the year before tax and before adjustments related to the
previous information is at P1,016,250 (Assume income tax rate at 35%). Accrual is yet to be made on the
bonuses.
 

Requirements:

What is the adjusted balance of the accrued officer bonuses accounts?

SOLUTION
Face value of discount coupons distributed 250,000
Distributors’ handling fee (250,000 * 10%) 25,000
Total 275,000
  75%
Premium Expense 206,250
Actual Cost/Reimbursement to distributors (140,250)
Estimated Liability for discount coupons, end 66,000
   
Unearned service revenue – beg 300,000
Cash collections during the year 490,000
Service revenue actually earned during the year (430,000)
Unearned service revenue – end 360,000
   
Unadjusted Net Income 1,016,250
Liability for discount coupons – overstated (109,750 – 66,000) 43,750
Unearned service revenue – understated (300,000 – 360,000) (60,000)
Adjusted Net Income 1,000,000
   
B = 10% (NI – Tx); Tx = 35% (NI – B)  
B = 10% (1,000,000 – 35% (1,000,000 – B))  
B = 65,000 + 0.035B  
B = P67,358  

Ans B -   67,358

Bell Inc. reported the following information in its long-term liability portion of its Statement of Financial
Position for the period ended December 31, 2018:

12% Bonds Payable P5,500,000

10% Note Payable – Bank 2,500,000

Deferred Tax Liability, net 340,000

Audit notes:

a.        The bonds payable with a face value of P5,000,000 was issued with the conversion option into
20,000, P100 par value ordinary shares at any time up to its maturity on June 30, 2023. These were
issued on June 30, 2018 when the prevailing yield rate on similar debt security without the conversion
option was 10%. The company recorded the transaction as a debit to Cash and credit to Bonds Payable
for the total consideration received. Interests are being paid semi-annually every December 31 and June
30 and were recorded appropriately. No other entries were made by the client affecting the carrying
value of the bonds.

Half of the bonds were retired on December 31, 2019 at par value. The prevailing yield rate on similar
debt instrument without the conversion option on this date was at 14%. The transaction is yet to be
recorded at year end.

 
b.       The 10% note payable to the bank is dated September 1, 2018 and is payable at the rate of
P500,000 annually every September 1 of each year starting 2019. Interests are also payable annually
every September 1.

c.        The deferred tax liability at the beginning of the year resulted to the following cumulative
temporary difference as of December 31, 2018:

Cumulative temporary difference creating future taxable P1,050,000

amount

Cumulative temporary difference creating future deductive

amount 200,000

At the end of the year the balances of the cumulative temporary differences were:

Cumulative temporary difference creating future taxable P1,550,000

amount

Cumulative temporary difference creating future deductive

amount 300,000

Income tax is at 40%.

Requirements:

What is the equity portion of the Convertible Bonds?

Ans B - 113,914

Bell Inc. reported the following information in its long-term liability portion of its Statement of Financial
Position for the period ended December 31, 2018:

12% Bonds Payable P5,500,000

10% Note Payable – Bank 2,500,000

Deferred Tax Liability, net 340,000

Audit notes:

a.        The bonds payable with a face value of P5,000,000 was issued with the conversion option into
20,000, P100 par value ordinary shares at any time up to its maturity on June 30, 2023. These were
issued on June 30, 2018 when the prevailing yield rate on similar debt security without the conversion
option was 10%. The company recorded the transaction as a debit to Cash and credit to Bonds Payable
for the total consideration received. Interests are being paid semi-annually every December 31 and June
30 and were recorded appropriately. No other entries were made by the client affecting the carrying
value of the bonds.

Half of the bonds were retired on December 31, 2019 at par value. The prevailing yield rate on similar
debt instrument without the conversion option on this date was at 14%. The transaction is yet to be
recorded at year end.

 
b.       The 10% note payable to the bank is dated September 1, 2018 and is payable at the rate of
P500,000 annually every September 1 of each year starting 2019. Interests are also payable annually
every September 1.

c.        The deferred tax liability at the beginning of the year resulted to the following cumulative
temporary difference as of December 31, 2018:

Cumulative temporary difference creating future taxable P1,050,000

amount

Cumulative temporary difference creating future deductive

amount 200,000

At the end of the year the balances of the cumulative temporary differences were:

Cumulative temporary difference creating future taxable P1,550,000

amount

Cumulative temporary difference creating future deductive

amount 300,000

Income tax is at 40%.

Requirements:

How much should be recognized in the profit or loss as a result of the retirement of half of the bonds at
the end of 2019?

Ans C - 279,392

Bell Inc. reported the following information in its long-term liability portion of its Statement of Financial
Position for the period ended December 31, 2018:

12% Bonds Payable P5,500,000

10% Note Payable – Bank 2,500,000

Deferred Tax Liability, net 340,000

Audit notes:

a.        The bonds payable with a face value of P5,000,000 was issued with the conversion option into
20,000, P100 par value ordinary shares at any time up to its maturity on June 30, 2023. These were
issued on June 30, 2018 when the prevailing yield rate on similar debt security without the conversion
option was 10%. The company recorded the transaction as a debit to Cash and credit to Bonds Payable
for the total consideration received. Interests are being paid semi-annually every December 31 and June
30 and were recorded appropriately. No other entries were made by the client affecting the carrying
value of the bonds.

Half of the bonds were retired on December 31, 2019 at par value. The prevailing yield rate on similar
debt instrument without the conversion option on this date was at 14%. The transaction is yet to be
recorded at year end.

 
b.       The 10% note payable to the bank is dated September 1, 2018 and is payable at the rate of
P500,000 annually every September 1 of each year starting 2019. Interests are also payable annually
every September 1.

c.        The deferred tax liability at the beginning of the year resulted to the following cumulative
temporary difference as of December 31, 2018:

Cumulative temporary difference creating future taxable P1,050,000

amount

Cumulative temporary difference creating future deductive

amount 200,000

At the end of the year the balances of the cumulative temporary differences were:

Cumulative temporary difference creating future taxable P1,550,000

amount

Cumulative temporary difference creating future deductive

amount 300,000

Income tax is at 40%.

Requirements:

How much is the total long-term liability to be presented in the 2019 Statement of Financial Position?

Sol.

SOLUTION
Proceeds from issuance of convertible bonds 5,500,000
FV of bonds without convertible option at 5% for 10 semi-annual  
periods
PV of Principal (5,000,000 * 0.613913) 3,069,566  
PV of Interest (300,000 * 7.721734) 2,316,520 (5,386,086)
Equity Portion (Share Premium – Convertible   113,914
Privilege)
     
Retirement Price   2,500,000
FV of the half bonds without convertible options at 7% for 7  
semi-annual remaining periods
PV of Principal (2,500,000 * 0.62275) 1,556,874  
PV of Interest (150,000 * 5.389289) 808,393 (2,365,267)
Equity Portion   134,733
     
FV of the half bonds without convertible options at 7% for 7 2,365,267
semi-annual remaining periods
Carrying Value (5,289,319 * 50%) (2644,659)
Loss on retirement   (279,392)
     
Equity Portion 134,733
Carrying Value – SP Convertible Privilege (113,914 * 50%) (56,957)
Capital Gain – Share Premium 77,776
     
 Financial Income after Permanent Difference 1,000,000
FDA for the period 100,000
FTA for the period (500,000)
Taxable Income 600,000
Tax Rate 40%
Current Tax Expense 240,000
     
Bonds Payable (5,289,319 * 50%)   2,644,659
Notes Payable – Long Term   1,500,000
Deferred Tax Liability (1,550,000 * 40%)   620,000
Total Non-current Liability   4,764,659

Ans D -  4,764,659

On January 2019, Sherlock Corp. granted to 600 employees, 100 share options each exercisable after 3
years, subject to the employees staying with the company until the end of 2021. Options can be
exercised if share price increases from P40 at the beginning of 2019 to above P60 at the end 2021. The
share options can be exercised at any time during the next five years that is by the end of 2026. The
company estimates the fair value of the share options on the grant date at P5 per option. This estimate
takes into account the possibility that the share price will exceed P60 per share at the end of 2021, thus
options are exercisable and the possibility that the share price will not exceed P60 at the end of 2021,
thus the share options will be forfeited.

The following information are deemed relevant:

Estimated number
Actual number of additional
of employees employees
actually leaving expected to leave
Fair Value of Fair Value of the company the company by
  Shares Options during the year the end 2021

12/31/2019 48 4 5 45

12/31/2020 44 3 20 35

12/31/2021 56 10 30  

Requirements:

What is the compensation expense in 2021?

Ans A - 92,500

On January 2019, Sherlock Corp. granted to 600 employees, 100 share options each exercisable after 3
years, subject to the employees staying with the company until the end of 2021. Options can be
exercised if share price increases from P40 at the beginning of 2019 to above P60 at the end 2021. The
share options can be exercised at any time during the next five years that is by the end of 2026. The
company estimates the fair value of the share options on the grant date at P5 per option. This estimate
takes into account the possibility that the share price will exceed P60 per share at the end of 2021, thus
options are exercisable and the possibility that the share price will not exceed P60 at the end of 2021,
thus the share options will be forfeited.

The following information are deemed relevant:

  Fair Value of Fair Value of Actual number Estimated number

 of additional
of employees employees
actually leaving expected to leave
the company the company by
Shares Options during the year the end 2021

12/31/2019 48 4 5 45

12/31/2020 44 3 20 35

12/31/2021 56 10 30  

Requirements:

What is the compensation expense in 2020?

Ans C - 88,333

On January 2019, Sherlock Corp. granted to 600 employees, 100 share options each exercisable after 3
years, subject to the employees staying with the company until the end of 2021. Options can be
exercised if share price increases from P40 at the beginning of 2019 to above P60 at the end 2021. The
share options can be exercised at any time during the next five years that is by the end of 2026. The
company estimates the fair value of the share options on the grant date at P5 per option. This estimate
takes into account the possibility that the share price will exceed P60 per share at the end of 2021, thus
options are exercisable and the possibility that the share price will not exceed P60 at the end of 2021,
thus the share options will be forfeited.

The following information are deemed relevant:

Estimated number
Actual number of additional
of employees employees
actually leaving expected to leave
Fair Value of Fair Value of the company the company by
  Shares Options during the year the end 2021

12/31/2019 48 4 5 45

12/31/2020 44 3 20 35

12/31/2021 56 10 30  

Requirements: 

What is the compensation expense in 2019?

Ans B - 91,667

Baker Corporation owns 300,000 of Street Inc.’s 1,000,000 shares issued and outstanding purchased on
January 2, 2019 at P20 per share. Street’s net assets had a book value on the said date at P16M. The
excess of acquisition cost over book value of net assets acquired was attributed to the total
understatement of Street’s Land and Building with a 5 year average useful life at P800,000 and
P1,200,000, respectively. The balance of the excess was attributed to Street’s unidentifiable asset.

 
Street Inc. declared P800,000 cash dividends by the end of 2019 and reported a total comprehensive
income amounting to P2,000,000 which is net of an unrealized holding loss from its investment at fair
value through other comprehensive income amounting to P500,000.

Requirements:

Assuming that Baker Corporation sold 120,000 of its investment in Street Corporation at P30 per share,
how much is the total gain on cessation should be recognized in the 2020 profit or loss?

Ans C - 2,562,000

SOLUTION

Share from net income (P2.5M * 30%) 750,000

Understatement in Depreciation (360,000/5yrs) (72,000)

Investment Income – P&L 678,000

   

Investment income – P&L 678,000

Share from Unrealized holding loss – OCI (P500,000 * 30%) (150,000)

Net amount to be reported in the SCI 528,000

   

Acquisition cost 6,000,000

Share from dividends (800,000 * 30%) (240,000)

Share from net income 678,000

Share from OCI (150,000)

Carrying Amount, 12/31/2019 6,288,000

   

Sale Transaction  

Proceeds (120,000sh * 30) 3,600,000

Carrying amount – sold (6,288,000 * 120,000sh/300,000sh) (2,515,200)

  1,084,800

Recycling of OCI (150,000 * 120,000sh/300,000sh) (60,000)

Gain on Sale 1,024,800

   

Reclassification  

FV of the remaining portion to be reclassified (180,000sh * 30) 5,400,000

Carrying amount – reclassified (6,288,000 * 180,000sh/300,000sh) (3,772,800)

  1,627,200

Recycling of OCI (150,000 * 180,000sh/300,000sh) (90,000)

Gain on Reclassification 1,573,200

    

Total Gain on Cessation 2,562,000

Baker Corporation owns 300,000 of Street Inc.’s 1,000,000 shares issued and outstanding purchased on
January 2, 2019 at P20 per share. Street’s net assets had a book value on the said date at P16M. The
excess of acquisition cost over book value of net assets acquired was attributed to the total
understatement of Street’s Land and Building with a 5 year average useful life at P800,000 and
P1,200,000, respectively. The balance of the excess was attributed to Street’s unidentifiable asset.

Street Inc. declared P800,000 cash dividends by the end of 2019 and reported a total comprehensive
income amounting to P2,000,000 which is net of an unrealized holding loss from its investment at fair
value through other comprehensive income amounting to P500,000.

Requirements:

How much total/net amount should be reported in Baker Corporation’s 2019 Statement of
Comprehensive Income?

Ans D - 528,000

Baker Corporation owns 300,000 of Street Inc.’s 1,000,000 shares issued and outstanding purchased on
January 2, 2019 at P20 per share. Street’s net assets had a book value on the said date at P16M. The
excess of acquisition cost over book value of net assets acquired was attributed to the total
understatement of Street’s Land and Building with a 5 year average useful life at P800,000 and
P1,200,000, respectively. The balance of the excess was attributed to Street’s unidentifiable asset.

Street Inc. declared P800,000 cash dividends by the end of 2019 and reported a total comprehensive
income amounting to P2,000,000 which is net of an unrealized holding loss from its investment at fair
value through other comprehensive income amounting to P500,000.

Requirements:

How much investment income should be reported in Baker Corporation’s profit or loss?

Ans A - 678,000

The property, plant and equipment section of Santos Corporations statement of financial position at
December 31, 2018 included the following items:

Land P600, 000

Land Improvements 280, 000

Buildings 2, 200, 000

Machinery and Equipment 1, 920, 000

The following transactions occurred during 2019:

a)       A tract of land was acquired for P300, 000. As of December 31, the company has not determined
its future use.
b)       A plant facility consisting of land and building was acquired from Gladiolus Company in exchange
for 40, 000 ordinary shares of Viola. On the date of acquisition, Viola’s share had a closing market price
of P37 per share on the Philippine Stock Exchange. The plant facility was carried on Gladiola’s books at
P220, 000 for land and P640, 000 for the building on the date of exchange. Current appraised values for
land and building, respectively are P460, 000 and P1, 380, 000

c)       On May 2019, items of machinery and equipment were purchased at a total cost of P896, 000,
inclusive of 12% VAT. Additional costs of P26, 000 for freight and P52, 000 for installation were incurred.

d)       Expenditures totalling P190, 000 were made for new parking lots streets and sidewalks at the
corporation’s various plant locations. These expenditures had an estimated life of 5 years.

e)       A machine costing P160, 000 on January 1, 2011 was scrapped on June 30, 2019. Double declining-
balance depreciation has been recorded on the basis of a year 10-year useful life.

f)        A machine was sold for P40, 000 for July 1, 2019. Original cost of the machine was P88, 000 on
January 1, 2016, and it was depreciated on a straight-line basis over an estimate useful life of or 7 years
and a salvage value of 4, 000

Requirements:

Adjusted balance of Machinery and Equipment as of December 31, 2019

Ans B - P2, 550, 000

The property, plant and equipment section of Santos Corporations statement of financial position at
December 31, 2018 included the following items:

Land P600, 000

Land Improvements 280, 000

Buildings 2, 200, 000

Machinery and Equipment 1, 920, 000

The following transactions occurred during 2019:

a)       A tract of land was acquired for P300, 000. As of December 31, the company has not determined
its future use.

b)       A plant facility consisting of land and building was acquired from Gladiolus Company in exchange
for 40, 000 ordinary shares of Viola. On the date of acquisition, Viola’s share had a closing market price
of P37 per share on the Philippine Stock Exchange. The plant facility was carried on Gladiola’s books at
P220, 000 for land and P640, 000 for the building on the date of exchange. Current appraised values for
land and building, respectively are P460, 000 and P1, 380, 000

c)       On May 2019, items of machinery and equipment were purchased at a total cost of P896, 000,
inclusive of 12% VAT. Additional costs of P26, 000 for freight and P52, 000 for installation were incurred.

d)       Expenditures totalling P190, 000 were made for new parking lots streets and sidewalks at the
corporation’s various plant locations. These expenditures had an estimated life of 5 years.

e)       A machine costing P160, 000 on January 1, 2011 was scrapped on June 30, 2019. Double declining-
balance depreciation has been recorded on the basis of a year 10-year useful life.

f)        A machine was sold for P40, 000 for July 1, 2019. Original cost of the machine was P88, 000 on
January 1, 2016, and it was depreciated on a straight-line basis over an estimate useful life of or 7 years
and a salvage value of 4, 000

Requirements:
Loss on scrapping of machine on June 30, 2019
Ans C - P24, 160

The property, plant and equipment section of Santos Corporations statement of financial position at
December 31, 2018 included the following items:

Land P600, 000

Land Improvements 280, 000

Buildings 2, 200, 000

Machinery and Equipment 1, 920, 000

The following transactions occurred during 2019:

a)       A tract of land was acquired for P300, 000. As of December 31, the company has not determined
its future use.

b)       A plant facility consisting of land and building was acquired from Gladiolus Company in exchange
for 40, 000 ordinary shares of Viola. On the date of acquisition, Viola’s share had a closing market price
of P37 per share on the Philippine Stock Exchange. The plant facility was carried on Gladiola’s books at
P220, 000 for land and P640, 000 for the building on the date of exchange. Current appraised values for
land and building, respectively are P460, 000 and P1, 380, 000

c)       On May 2019, items of machinery and equipment were purchased at a total cost of P896, 000,
inclusive of 12% VAT. Additional costs of P26, 000 for freight and P52, 000 for installation were incurred.

d)       Expenditures totalling P190, 000 were made for new parking lots streets and sidewalks at the
corporation’s various plant locations. These expenditures had an estimated life of 5 years.

e)       A machine costing P160, 000 on January 1, 2011 was scrapped on June 30, 2019. Double declining-
balance depreciation has been recorded on the basis of a year 10-year useful life.

f)        A machine was sold for P40, 000 for July 1, 2019. Original cost of the machine was P88, 000 on
January 1, 2016, and it was depreciated on a straight-line basis over an estimate useful life of or 7 years
and a salvage value of 4, 000

Requirements:

Adjusted balance of land as of December 31, 2019

Ans A - P970, 000

Which of the following regarding the standards-setting councils is correct?

ANSWER IS A: Each of the councils is composed of 15 members including the chairman.

Which of the following fundamental principles would most likely be threatened when a
professional accountant in public practice competes directly with a client or has a joint venture
or similar arrangement with a major competitor of a client?

Answer is b: objectivity

These audits are similar in most respects

Answer is C: Financial and compliance

Governmental audit includes examination of financial statements, program results, economy,
efficiency, effectiveness and

Answer is B: Compliance

Operational audits generally have been conducted by internal and COA auditors, but may be
performed by certified public accountants. A primary purpose of an operational audit is to
provide

Answer is A: A measure of management performance in meeting organizational goals.

Which of the following types of audits are most similar?

Answer is C: Compliance audits and independent financial statement audits

Which of the following criteria is unique to the independent auditor’s attest function?

Answer is D: Independence

Examination of evidence regarding an assertion to determine its correspondence to established

criteria carried out in a manner suitable to the court

Answer is A: Forensic audit

It refers to the functions and activities necessary for the performance of a major purpose for
which a government agency is established.

Answer is A: Program

The following are the general principles governing audit of financial statements:
I.      Loyalty
II.     Confidentiality
III.   Objectivity
IV.   Professionalism
V.    Professional Behaviour
VI.   Independence
Answer is D: II, III , V and VI only

This audit involves a review of an organization’s procedures to determine whether the

organization adheres to specific procedures, rules or regulations set by an authoritative body.

Answer is A: Compliance

Criteria in operational audits, based on the Framework, are normally

Answer is C: Specifically-developed criteria

Which of the following best describes the operational audit?

Answer is D: It concentrates on seeking out aspects of operations in which would be reduced by

the introduction of controls

Quality control policies and procedures should provide the firm reasonable assurance that the
policies and procedures relating to the other elements of quality control are being effectively
applied. This statement defines the quality control element of

Answer is D: Monitoring

A quality control policy that requires personnel in the firm to adhere to integrity, objectivity,
confidentiality and professional behavior, relates to

Answer is A: Ethical Requirements

Which of the following is a category of risk factors that should be considered in relation to
misstatements arising from fraudulent financial reporting?

Answer is C: industry conditions

The following are examples of circumstances that may indicate the possibility that the financial
statements may contain a material misstatements resulting from fraud except

Answer is A: Transactions that are recorded in a complete or timely manner or are properly
recorded as to amount, accounting period, classification, or entity policy

The auditor’s best defense when material misstatements in the financial statements are not
uncovered in the audit is that

Answer is C: the audit was conducted in accordance with PSA

An intentional act by one or more individuals among management, employees, or third parties
which results in a misrepresentation of financial statements is referred to as

Answer is B: fraud

The risk of not detecting a material misstatement resulting from fraud is higher than the risk of
not detecting a material misstatement resulting from error because

Answer is B: Fraud is ordinarily accompanied by acts specifically designed to conceal

its existence

The auditor least likely obtains written representations from management that the
management:

Answer is D: It has disclosed to the auditor the results of its assessment of the risk that the
financial statements may be materially misstated as a result of fraud

In connection with the examination of financial statements, an independent auditor could be

responsible for failure to detect a material fraud

Answer is B: The auditor planned the work in a hasty and inefficient manner.

The following are examples of circumstances that may indicate the possibility that the financial
statements may contain a material misstatements resulting from fraud, except

Answer is C: Unavailability of other than photocopied r electronically transmitted documents

when documents in original form are expected to exist.

Experience has shown that certain conditions in an organization are symptoms of possible
management fraud. Which of the following conditions would not be considered an indicator of
possible fraud?

Answer is D: Managements are subject to formal performance review on a regular basis.

The absence of which of the following internal control increases the opportunity for fraud?

Answer is D: The absence of any of the above increases the opportunity for fraud

Which of the following might not be a signal of a lack of integrity in management?

Answer is A: Prior criminal conviction of an assembly line foreman

Fraudulent financial reporting is most likely to be committed by whom?

Answer is D Company management

The following are examples of circumstances that may indicate the possibility that the financial
statements may contain a material misstatements resulting from fraud, except

Answer is D: Significant explained items on reconciliations

The auditor’s opinion

Answer is A: Enhances the credibility of the financial statements.

Which of the following statements concerning materiality is not correct?

Answer is D: The materiality level for the financial statements as a whole determined in the
planning stage of the audit should not be affected by changes in the circumstances of the
engagement.

Inherent risk and control risk differ from detection risk in that they

Answer is C: Exist independently of the financial statement audit.

Which statement is incorrect regarding the extent of tests of controls?

Answer is B: The more the auditor relies on the operating effectiveness of controls in the
assessment of risk, the lesser is the extent of the auditor’s tests of controls.

Which of the following would an auditor most likely use in determining the auditor’s preliminary
judgment about materiality?

Answer is B: The entity’s annualized interim financial statements.

Which of the following statements best describes materiality?

Answer is D: Materiality is the amount at which judgment based on the financial statements
may be altered.

Which of the following are considered control environment elements?

Commitment   to Competence               Detection Risk                        

Organizational Structure

Answer is C: Yes         No           Yes

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are
Answer is D: Functions of the client and its environment while detection risk is not.

Which of the following conditions or events may create incentives/pressures to commit fraud?
Answer is C: Excessive pressure on management or operating personnel to meet financial
targets established by those charged with governance, including sales or profitability incentive
goals.

Which of the following statements concerning materiality threshold is incorrect?

Answer is B: In general, the more misstatements the auditor expects, the higher should be the
aggregate materiality threshold.

An auditor should consider two key issues when obtaining an understanding of a client’s
internal controls.  These issues are
Answer is C: The design and implementation of the controls.

                                                                                  
The risk that financial statements are likely to be misstated materially without regard to the
effectiveness of internal control is which type of risk?

Answer is A: Inherent risk

With respect to errors and fraud, which of the following should be part of an auditor’s planning
of the audit engagement?
Answer is D: Planning to consider factors affecting the risk of material misstatement both at the
financial statement and the account balance level

Which of the following audit risk components may be assessed in non-quantitative

terms?
1)     Inherent Risk
2)     Control Risk
3)     Detection Risk

Answer is D; 1)   Yes       2)   Yes       3)   Yes

In audit of financial statements, it is considered in terms of the smallest aggregate level of

misstatements that could be considered material to any  one of the statements that comprise
to financial statements, while in financial reporting, it provides a threshold or cut off point rather
than being a primary qualitative characteristics which information must have if it is to be useful

Answer is A: Materiality

In an audit of financial statements in accordance with generally accepted auditing standards, an

auditor is required to

Answer is A: Document the auditor’s understanding of the entity’s internal control

The auditor’s assessment of the identified risks at the assertion level provides a basis for
considering the appropriate audit approach for designing and performing further audit
procedures.  Which of the following is incorrect?

Answer is D: The auditor designs and performs substantive procedures for each material class
of transactions, account balance, and disclosure only when the auditor uses the substantive
approach.

Which of the following controls is not usually performed in the accounts payable department?

Answer is C: Accounting for unused prenumbered purchase orders and receiving reports.

During the initial planning phase of an audit, a CPA most likely would

Answer is C: Discuss the timing of the audit procedures with the client’s management

The risk that the auditor may unknowingly fail to appropriately modify the unqualified opinion on
financial statements that are materially misstated is referred to as

Answer is A: audit risk

Opportunities to misappropriate assets increase when there are

Answer is D: Inventory items that are small in size, of high value, or in high demand.

The following are examples of conditions and events that may indicate the existence of risks of
material misstatement, except

Answer is a: Operations in regions that are economically stable.

Analytical procedures used during risk assessment in an audit should focus on

Answer is C: Enhancing the auditor’s understanding of the client’s business

After discovering that a related-party transaction exists, the auditor should be aware that the

Answer is A: substance of the transaction could be significantly different from its form.
Which of the following statements is true?

Answer is B: If control risk is assessed at maximum, the nature of related substantive tests
should be changed from less to more effective.

The auditor is required to determine three different levels of materiality:  (1) materiality for the
financial statements as a whole, (2) performance materiality, and (3)

Answer is D: Specific materiality

Which statement is incorrect regarding the nature, timing and extent of substantive procedures?

Answer is C: Substantive procedures cannot be performed at an interim date.

Which of the following would not be a source of information about risk of a potential new audit
client?

Answer is D: The new auditor’s permanent file

When control risk is assessed as low for assertions related to payroll, substantive procedures of
payroll balances most likely would be limited to applying an alytical procedures and

Answer is D: Recalculating payroll accruals

Authorizations can be either general or specific.  Which of the following is not an example of a
general authorization?

Answer is B: A sales manager’s authorization for a sales return.

After gaining an understanding of internal control and assessing the risks of material
misstatement, an auditor decided to perform tests of controls.  The auditor most likely decided
that

Answer is B: It is not possible or practicable to reduce the risks of material misstatement at the
assertion level to an acceptably low level with audit evidence obtained only from substantive
test procedures.

On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk from that originally planned. To achieve an overall audit risk level
that is substantially the same as the planned audit risk level, the auditor would

Answer is B: Decrease detection risk

Which of the following is not one of the three primary objectives of effective internal control?

Answer is D: Assurance of elimination of business risk.

Audit risk consists of inherent risk, control risk, and detection risk. Which of the following
statements is true?

Answer is A: Cash is more susceptible to theft than an inventory of coal because it has a greater
inherent risk.

Which statement is incorrect regarding the timing of tests of controls?

Answer is C: If the auditor plans to rely on controls that have not changed since they were last
tested, the auditor should test the operating effectiveness of such controls at least once in
every second audit.

In comparing management fraud with employee fraud, the auditor’s risk of failing to discover
the fraud is
Answer is C; greater for management fraud because of management ‘s ability to override
existing internal controls.

Each of the following may be relevant to an auditor when obtaining knowledge about the client’s
business and industry, except

Answer is A: Performing a walkthrough tests

Which of the following is incorrect regarding PSA 315?

Answer is D: This PSA discusses the auditor’s responsibility to determine overall responses and
to design and perform further audit procedures whose nature, timing, and extent are responsive
to the risk assessments.

While assessing the risks of material misstatement auditors identify risks, relate risk to what
could go wrong, consider the magnitude of risks and

Answer is D: Consider the likelihood that the risks could result in material misstatements\

Which statement is incorrect regarding evaluation of the sufficiency and appropriateness of

audit evidence obtained?

Answer is C: In developing an opinion, the auditor considers only the audit evidence which
corroborate the assertions in the financial statements.

Which of the following audit risk components may be assessed in non-quantitative terms?
(Control risk, Detection risk, Inherent risk)

Answer is C: Yes, Yes, Yes

To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques
including

Answer is A: Inquiry

An auditor decides to increase the assessed level of control risk from that originally planned on
the basis of audit evidence gathered and evaluated.  To achieve an overall audit risk level that is
substantially the same as the planned audit risk level, the auditor would

Answer is D: Decrease detection risk.

After obtaining a sufficient understanding of internal control, the auditor assesses

Answer is D: Control risk to determine the acceptable level of detection risk.

Which of the following statements is correct concerning an auditor’s assessment of control

risk?

Answer is A: Assessing control risk may be performed concurrently during an audit with
obtaining an understanding of the entity’s internal control.

Which of the following factors most likely would influence an auditor’s determination of the
auditability of an entity’s financial statements?

Answer is C: The adequacy of the accounting records

Which of the following is not required by PSA No. 315, “Consideration of Fraud in a Financial
Statement Audit”?

Answer is C: Conduct the audit with professional skepticism, which includes an attitude that
assumes balances are incorrect until verified by the auditor.

The following are examples of fraud risk factors relating to misstatements arising from
misappropriation of assets, except
Answer is A: Recurring negative cash flows from operating activities while reporting earnings
and earnings growth.

Which of the following statements concerning the relevance of various types of controls to a
financial statement audit is correct?

Answer is C: Controls over the reliability of financial reporting are ordinarily most directly
relevant to a financial statement audit, but other controls may also be relevant.

Which statement is incorrect regarding significant risks that require special audit consideration?

Answer is C; Routine, non-complex transactions that are subject to systematic processing are
more likely to give rise to significant risks because they have higher inherent risks.

Which of the following factors best define the materiality of audit risk?

1)      Volume of transactions.
2)      Degree of system integration.
3)      Years since last audit.
4)      Significant management turnover.
5)      Value of assets at risk.
6)      Average value per transaction.
                  7)      Result of last audit.

Answer is C: 1,5, and 6

Which one of the following is not considered a valid source of information about the client’s
processes?

Answer is A: Confirmation of third parties

An audit plan is a

Answer is B: document that provides an overview of the company and a general plan for the
audit work to be accomplished, timing of the work, and other matters of concern to the audit.

The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the

Answer is D: schedules and analyses to be prepared by the client’s staff.

When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor
should

Answer is A: make inquiries of management regarding their policies and their knowledge of
violations, and then rely on normal audit procedures to detect errors, irregularities, and
illegalities.

When a CPA is approached to perform an audit for the first time, the CPA should make inquiries
of the predecessor auditor. This is a necessary procedure because the predecessor may be able
to provide the successor with information that will assist the successor in determining

Answer is D: whether the engagement should be accepted.

Which of the following is a responsibility that should not be assigned to only one employee?

Answer is A: Access to securities in the company’s safe deposit box.

The overall attitude and awareness of an entity’s board of directors concerning the importance
of the internal control structure usually is reflected in its

Answer is C: Control environment

An auditor concludes that there is a material inconsistency in the other information in an annual
report to shareholders containing audited financial statements. If the auditor concludes that the
financial statements do not require revision, but the client refuses to revise or eliminate the
material inconsistency, the auditor may

Answer is A: Revise the auditor's report to include a separate explanatory paragraph describing
the material inconsistency.

Negative assurance may be expressed when an accountant is requested to report

agreed-upon procedures to specified
1)      Elements of a Financial Statement
2)      Accounts of a Financial Statement

Answer is C: 1)   No       2)   No

According to PSA 210 (Terms of Engagements), which of the following is appropriately

included in an engagement letter?

(I) Because of the test nature and other inherent limitations of an audit, together with
the inherent limitations of any accounting and internal control system, there is
unavoidable risk that even some material misstatements may remain undiscovered

(II )Our audit will be made with the objective of our expressing an opinion on the
financial statements

(III )An audit also includes evaluating the accounting policies used and significant
estimates made by management

Answer is D: I, II, III

Audit committees have been identified as a major factor in promoting independence in both

internal and external auditors. Which of the following is the most important limitation on the
effectiveness of audit committees?

Answer is D: Audit committees are composed of independent directors. However, those

directors may have close personal and professional friendships with management

The responsibility for the identification and disclosure of related parties and transactions with
such parties rests with:

Answer is B: Managemen

You are auditing the cash of Watson Corp. for the fiscal year ended September 30,
2019.
 
The bank reconciliation prepared by the account of Watson Corp. for the month of
August is presented below:
 
Bank balance, per bank statement P156,000
Add: Deposit in transit, August 31 2,700
Total 158,700
Less: Outstanding checks  
    No. 547                    P 600  
           561                    5,400  
           562                    4,200  
            565                    1,800 12,000
Adjusted Balance 146,700
   
Book balance, per general ledger P120,000
Add: Proceeds of note receivable collected by bank in 24,000
August
         Deposit made in bank on August 31 not recorded
on books until
            September 3,000
Total 147,000
Less: Bank Service charge 300
Adjusted Balance 146,700
 
There was no available bank reconciliation for the month of September; instead, the
accountant provided you a copy of the September bank statement to aid you in your
audit.
 
The September bank statement included the following bank debits and credits:
Date Particulars Debits   Credits  
Aug 31          
Sep 1 Chk #561 5,400   2,700  
Sep 6 Chk #562 4,200      
Sep 9 Chk #565 1,800   30,000  
Sep 12   420 DM 420  
Sep 15 Chk #566 3,000      
Sep 17       600  
Sep 20 Chk #567 2,100   42,000  
Sep 27 Chk #569 4,320      
Sep 29   300 EC 300 EC
Sep 30   1,320 SV    
Sep 30   900 DM    
Sep 30 Chk #570 5,460      
  SV – Service Charges DM – Debit Memo
  EC – Error Corrected CM – Credit Memo
 
Further investigation revealed the following information:
a.        All book reconciling items during August has been recorded in September.
b.       The check register revealed that the last check issued in September was No. 571
for P3,000 and that check No. 568 was P7,200.
c.        Cash received for the period September 25 through 31 of P28,200 was deposited
in the bank on October 1.
d.       The debit memo on September 12 and September 30 were customer NSF checks
returned by the bank. The check on September 12 was immediately redepostied without
entry. The check returned on September 31 was redeposited by the client in the bank on
October 1 also without entry.
e.        Among the bank credits for the month was P600 deposit of Irene Corp. credited
by the bank to the company’s account.
 
Requirements: Based on your audit procedures and appreciation of the above data,
answer the following:

How much is the unadjusted bank balance as of September 30, 2019?

Answer is D: 202,800